Judge Timothy Patrick Dillon, Case 21STCV29644 2022-10-14 Tentative Ruling

Judge: Timothy Patrick Dillon, Case: 21STCV29644, Date: 2022-10-14 Tentative Ruling

Counsel for Plaintiff/Cross-Defendant (Movant): Stephen P. Semos, Baker Burton & Lundy, P.C.

Counsel for Defendant/Cross-Complainant (Opposition): Jeffrey S. Goodfried, Freeman, Freeman & Smiley, LLP

Plaintiff/Cross-Defendant’s (TMG) Demurrer to Defendant/Cross-Complainant’s (NC Dynamics) First Amended Cross-Complaint is OVERRULED.

This case concerns a contract dispute for the sale and alleged underperformance of specialized machinery. NC Dynamics, the Defendant/Cross-Complainant, is a full-service manufacturing facility that manufactures products for aerospace companies. (FACC ¶ 5.) According to NC Dynamics, NC Dynamics took steps to upgrade the manufacturing process in regard to an existing contract it had with Bombardier Aerostructures (“Bombardier”). (FACC ¶ 8.) As part of that process, NC Dynamics requested bids from three companies to sell manufacturing equipment to NC Dynamics. (FACC ¶ 9.) NC Dynamics also requested the companies to conduct time studies to establish the running time for the construction of specific titanium parts for the Bombardier contract. (FACC ¶ 10.)

The Machine Group (“TMG”), the Plaintiff/Cross-Defendant in this case, was one of the three companies to submit a bid, but the only company that offered to sell an upcoming machine from another company called OKK. (FACC ¶ 9.) OKK conducted the time study. (FACC ¶ 11, 14.) NC Dynamics contend that TMG ultimately won the bid based on a guarantee made by TMG President Richard Wackeen (“Wackeen”) that the parts would be manufactured in ten hours with the OKK machine (FACC ¶ 11) and also upon the misrepresentation that OKK was aware that Wackeen was guaranteeing a ten hour running time (FACC ¶¶ 12, 16).

NC Dynamics and TMG entered into two contracts for the purchase of two OKK machines. (FACC ¶¶ 17, 18.) The machines failed to construct the parts in the contracted ten-hour running time, and multiple attempts were made to reduce the running time. (FACC ¶¶ 20-23.) Because of the slow running time, NC Dynamics contend that they were forced to purchase a third machine from TMG to meet its production needs for the Bombardier contract. (FACC ¶ 26.) NC Dynamics further allege that TMG continued to guarantee that the OKK machines would achieve the ten-hour running time despite knowing the OKK machine could not do so. (FACC ¶¶ 29-30.) NC Dynamics later learned that six weeks before the parties entered into the third contract, a TMG manager named Jim McCulloch (“McCulloch”) admitted in an email that the OKK machines would never achieve a running time. (FACC ¶ 29.) McCulloch was present to witness the final run of the OKK machines, which at the lowest point exceeded 24 hours. (FACC ¶ 32.) As a result of the running time, NC Dynamics contend that they lost Bombardier, and others, as a current and future customer. (FACC ¶ 31.) NC Dynamics now brings seven causes of action: (1) breach of contract; (2) fraud in the inducement; (3) negligence; (4) intentional interference with contractual relations; (5) intentional interference with prospective economic relations; (6) negligent interference with prospective economic relations; and (7) breach of warranty of fitness for particular purpose.

On August 11, 2021, TMG filed a Complaint against NC Dynamics for breach of contract and recission. NC Dynamics demurred and moved to strike TMG’s complaint, which this Court overruled on February 16, 2022.

On March 18, 2022, NC Dynamics filed a cross-complaint against TMG. On May 31, 2022, TMG demurred to the cross-complaint. This Court sustained the TMG’s demurrer on July 22, 2022 to the challenged causes of action. (07/22/22 Minute Order.)

On August 1, 2022, NC Dynamics filed a First Amended Cross-Complaint (“FACC”). On September 2, 2022, TMG filed the instant Demurrer with Motion to Strike. On September 26, 2022, NC Dynamics filed its Opposition. TMG replied on September 30, 2022.

Upon review of the declaration submitted along with the instant demurrer, the Court finds that TMG has satisfied the meet and confer requirement set forth in Code of Civil Procedure § 430.41. (Semos Decl. ¶ 2.) Accordingly, the Court considers the Demurrer on the merits.

TMG demurs to the FACC on the following grounds: (1) the Second Cause of Action does not state facts sufficient to constitute a cause of action for fraud; (2) the Second Cause of Action is vague and uncertain; (3)The Third Cause of Action does not state facts sufficient to constitute a cause of action for negligence; (4) the Fourth Cause of Action does not state facts sufficient to constitute a cause of action for intentional interference with contractual relations; (5) the Fifth Cause of Action fails to state facts sufficient to constitute a cause of action for intentional interference with prospective economic relations; (6), the Fourth and Fifth Causes of Action are barred by the applicable Statute of Limitations; and (7) the Sixth Cause of Action fails to state facts sufficient to constitute a cause of action for negligent interference with prospective economic relations.

A demurrer tests the sufficiency of whether the 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 contest--any 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. (SKF Farms v. Superior Court¿(1984) 153 Cal. App. 3d 902, 905.)¿ Therefore, it lies only where the defects appear on the face of the pleading or are judicially noticed.¿¿(Code Civ. Proc., §§ 430.30, 430.70.)¿ The only issue a demurrer is concerned with is whether the complaint, as it stands, states a cause of action.¿¿(Hahn, supra,¿147 Cal.App.4th¿at¿747.)

“The elements of fraud,” including a cause of action for fraudulent inducement, “are (a) a misrepresentation (false representation, concealment, or nondisclosure); (b) scienter or knowledge of its falsity; (c) intent to induce reliance; (d) justifiable reliance; and (e) resulting damage.” (Hinesley v. Oakshade Town Ctr. (2005) 135 Cal.App.4th 289, 294.) The facts constituting the alleged fraud must be alleged factually and specifically as to every element of fraud, as the policy of “liberal construction” of the pleadings will not ordinarily be invoked. (Lazar v. Superior Court (1996) 12 Cal.4th 631, 645.) To properly allege fraud against a corporation, the plaintiffs must plead the names of the persons allegedly making the false representations, their authority to speak, to whom they spoke, what they said or wrote, and when it was said or written. (Tarmann v. State Farm Mut. Auto. Ins. Co. (1991) 2 Cal.App.4th 153, 157.)

TMG contends that the intent and scienter elements of a fraudulent inducement claim can not be satisfied by aggregating statements from multiple individuals. The applicable statements are Wackeen’s time guarantee and McCulloch’s email stating to the effect that it was known company-wide that the OKK machines would never achieve a running time of ten hours. (FACC ¶ 29.) NC Dynamics argues in opposition that TMG fails to cite any authority for that proposition yet itself relies on case law^{^[1]} inapplicable to this case. Thus, the issue is whether Wackeen knew that the OKK machines would never reach the ten-hour running time, as McCulloch indicated in the email, and when so representing to NC Dynamics.

Accepting as true all reasonable inferences of a well-pleaded complaint, the Court finds that NC Dynamics states a claim for fraud in the inducement as to the third contract. McCulloch’s statement—“we all know [the running time of the OKK machine] will never be 10 hours” (FACC ¶ 29)—can be reasonably construed to include Wackeen and his knowledge that the OKK machines will never perform to the terms of the contract. This satisfies these elements.

TMG further contends that NC Dynamics does not state facts sufficient to show a material misrepresentation occurred. To show a material misrepresentation, TMG argues that NC Dynamics must establish a causal connection between Wackeen’s representation that OKK knew of TMG’s running time guarantee and the underperformance of the OKK machines. NC Dynamics argue that the FACC contains detailed allegations to state a claim for fraud in the inducement, including the allegation that TMG represented that OKK was aware of the guaranteed running time despite OKK’s lack of awareness of the same and the representation s that a 10-hour run time would be achieved.(FACC ¶¶ 12-13.) OKK’s full support of the 10-hour guarantee is a material representation. In reality, NC Dynamics alleges that there was no such support. (Ibid.)

TMG misstates the issue. The issue is whether Wackeen’s allegedly false representation—that OKK knew of TMG’s time guarantee in forming sales contracts of the OKK machine—is material. At this early stage, the Court so finds. NC Dynamics has set forth allegations of the materiality of the ten-hour running time in agreeing to all three contracts. (See FACC ¶¶ 11-13.) Further, NC Dynamics alleges that TMG “offered to do all the programming on the machines” because NC Dynamics “would not have the programming capacity to bring the machines into proper production.” (FACC ¶ 16.) Read in context, the assurances of a ten-hour running time and OKK’s full support of the guarantee contributed to TMG winning the bid. (FACC ¶¶ 16, 34.) Thus, Wackeen’s representation that OKK was aware of and supported TMG’s timing guarantee is a material misrepresentation. At this point, on demurrer, NC Dynamics has set forth facts sufficient to state a fraud in the inducement claim.

TMG contends, confusingly so, that the Second Cause of Action is uncertain. A special demurrer for uncertainty pursuant to Code of Civil Procedure § 430.10(f) is disfavored and will only be sustained where the pleading is so bad that one cannot reasonably respond—i.e., cannot reasonably determine what issues must be admitted or denied, or what counts or claims are directed against the party. (Khoury v. Maly’s of California, Inc. (1993) 14 Cal.App.4th 612 at 616.) Moreover, even if the pleading is somewhat vague, “ambiguities can be clarified under modern discovery procedures.” (Id.) A review of the pleadings reveals that the FACC is not so bad that TMG cannot reasonably respond. Additionally, TMG identifies the Second Cause of Action in its Demurrer and argues a lack of sufficient facts, which show TMG could reasonably respond to the claims directed at it in the FACC.

Accordingly, the Court OVERRULES the Demurrer as to the Second Cause of Action based on uncertainty.

To state a claim for negligence, a plaintiff must allege (1) the existence of a legal duty of care, (2) breach of that duty, and (3) proximate cause resulting in an injury. (McIntyre v. Colonies-Pacific, LLC (2014) 228 Cal.App.4th 664, 671.)

TMG argues that the conduct NC Dynamic complains of amounts to an alleged breach of contract rather than a cause of action for negligence because TMG’s alleged running time misrepresentation does not violate an independent duty of the contract. NC Dynamics opposes on the ground that the same conduct may support a breach of contract and a tort claim, as has been alleged here.

The Court agrees with NC Dynamics. Both parties cite Erlich v. Menezes to support their positions, but critically, TMG overlooks the language in Erlich that expressly supports NC Dynamic’s position. (See Erlich v. Menezes (1999) 21 Cal.4th 543, 551 (approving of the observation that “the same wrongful act may constitute both a breach of contract and an invasion of an interest protected by the law of torts.” (Citation omitted.).) The court in Erlich also observed that “[t]ort damages have been permitted in contract cases . . . where the contract was fraudulently induced.” (Id. at p. 551-52 citing Las Palmas Associates v. Las Palmas Center Associates (1991) 235 Cal.App.3d 1220, 1238-1239.) NC Dynamics has so alleged. Furthermore, it can be reasonably inferred from the allegations that TMG had a duty of care to make truthful representations in negotiating the three contracts with NC Dynamics. TMG’s alleged failure to do so constituted a breach of that duty resulting in lost business contracts. (See FACC ¶¶ 31, 50-53.) Accordingly, the Court OVERRULES the Demurrer as to the Third Cause of Action.

TMG argues that NC Dynamics fails to allege facts to support the intentional act element of the fourth and fifth causes of action because no “wrongful act” is alleged. Nor does a foreseeable relationship exist between the alleged behavior and NC Dynamics’ contract with Bombardier.

The fourth cause of action is intentional Interference with contractual relations, the elements of which are “(1) a valid contract between plaintiff and a third party; (2) defendant’s knowledge of this contract; (3) defendant's intentional acts designed to induce a breach or disruption of the contractual relationship; (4) actual breach or disruption of the contractual relationship; and (5) resulting damage.” (I-CA Enterprises, Inc. v. Palram Americas, Inc. (2015) 235 Cal.App.4th 257, 289.)

Citing Quelimane Co. v. Stewart Title Guar. Co. (1998) 19 Cal.4th 26, 56, NC Dynamics contends that it is sufficient to allege that an actor knew or was substantially certain that interference would occur as a result of the actor’s conduct. TMG argues that NC Dynamics must also show a wrongful act independent of the interference itself. For this proposition, TMG cites Korea Supply Co. v. Lockheed Martin Corp. (2003) 29 Cal.4th 1134, 1154, and Della Penna v. Toyota Motor Sales, U.S.A., Inc. (1995) 11 Cal.4th 376, 378.

NC Dynamics correctly contends that it is not required to allege the existence of an independent wrongful act because Della Penna concerned the tort of intentional interference with prospective economic relations. NC Dynamics alleges that TMG was substantially certain that its misrepresentations and actions would interfere with the Bombardier contract. (See FACC ¶ 56-58.) This is sufficient. Under the controlling case case law, at this point, NC Dynamics states a claim for intentional interference with contractual relations.

The Fifth Cause of Action is intentional interference with prospective economic relations. The elements of intentional interference with prospective economic advantage are “(1) an economic relationship between the plaintiff and some third party, with the probability of future economic benefit to the plaintiff; (2) the defendant’s knowledge of the relationship; (3) intentional or negligent acts on the part of the defendant designed to disrupt the relationship; (4) actual disruption of the relationship; and (5) economic harm to the plaintiff proximately caused by the acts of the defendant.” (Crown Imports, LLC v. Superior Court (2014) 223 Cal.App.4th 1395, 1404, citations, brackets, and quotation marks omitted.) “[T]he third element also requires a plaintiff to plead intentional wrongful acts on the part of the defendant designed to disrupt the relationship.” (Korea Supply Co., 29 Cal.4th at p. 1154 citing Della Penna, 11 Cal.4th at p. 390.) “[T]he facts pleaded by a plaintiff must show an intent to do something which takes the defendant’s acts beyond those of a mere competitor securing business for himself.” (A.F. Arnold & Co. v. Pacific Professional Ins., Inc. (1972) 27 Cal.App.3d 710, 716.)

Here, NC Dynamics states a claim. NC Dynamics has alleged sufficient wrongful acts on the part of TMG that were “designed to disrupt the relationship” between NC Dynamics and Bombardier. Under Korea Supply, at this early stage, NC Dynamics alleges that TMG knew its alleged wrongful acts were substantially certain to injure NC Dynamics’ business expectancy with Bombardier. NC Dynamics alleges that TMG was substantially certain that their running time misrepresentations would interfere with prospective Bombardier business. (See FACC ¶ 64.) NC Dynamics has alleged an independent wrong acts. NC Dynamics alleges sufficient facts to state an intentional interference with prospective economic relations claim based on the substantial certainty prong.

TMG quickly argues that the alleged conduct undergirding the sixth cause of action “amounts to little more than an alleged breach of contract.” NC Dynamics, again citing Erlich, supra, contends that overlap in the underlying supporting facts does not render deficient the negligent interference claim.

“The elements of negligent interference with prospective economic [relations] are (1) the existence of an economic relationship between the plaintiff and a third party containing the probability of future economic benefit to the plaintiff; (2) the defendant’s knowledge of the relationship; (3) the defendant’s knowledge (actual or construed) that the relationship would be disrupted if the defendant failed to act with reasonable care; (4) the defendant’s failure to act with reasonable care; (5) actual disruption of the relationship; and (6) economic harm proximately caused by the defendant’s negligence.” (Redfearn v. Trader Joe’s Co. (2018) 20 Cal.App.5th 989, 1005.)

The Court agrees with NC Dynamics. Moreover, the Court finds that NC Dynamics alleges facts sufficient to state a claim for negligent interference with prospective economic advantage. NC Dynamics has alleged the existence of an economic relationship with Bombardier (FACC ¶ 8); that TMG knew of the relationship (FACC ¶ 71); that TMG was aware or should have known that a failure to act with due care would interfere with the relationship (FACC ¶ 71); that TMG failed to act with reasonable care by representing that OKK guaranteed the required running time and continuing to so represent despite knowing the machines could not achieve the running time (FACC ¶¶ 11-13, 29, 72); and that NC Dynamics lost Bombardier altogether as a current and future customer because NC Dynamics could no longer fulfill its obligation to Bombardier or offer a contract with a lower price (FACC ¶ 72). Each element is met.

When a demurrer is sustained, the court may choose to grant or deny leave to amend. (Cal. Code Civ. Proc. § 430.41(e)(1)). Leave to amend following a demurrer must be allowed where there is a reasonable possibility plaintiff can amend the complaint to cure the defect. (Schulz v.¿Neovi¿Data Corp.¿(2007) 152 Cal.App.4th 86, 92.)¿ Although the Court has sustained once before a demurrer to the original cross-complaint with respect to the intentional interference claims, the Court grants leave to amend.

A motion to strike lies only where the pleading has irrelevant, false or improper matter, or has not been drawn or filed in conformity with laws.¿ (Code Civ. Proc. § 436.)¿ The grounds for moving to strike must appear on the face of the pleading or by way of judicial notice.¿ (Id. § 437.)¿¿¿

TMG requests the Court to strike the following portions of the FACC without leave to amend:

The Prayers for Relief are for the Second, Fourth and Fifth Causes of Action. Because the Court overrules the Demurrer as to the Second, Fourth and Fifth Causes of Action, the court rules on the Motion to Strike as to those claims.

Citing Miller v. Nat’l Am. Life Ins. Co. (1976) 54 Cal.App.3d 331, 336, TMG moves to strike the Third Prayer because punitive damages are not available in an action based solely upon breach of a contractual obligation. But, as stated above, “tort damages have been permitted in contract cases . . . where the contract was fraudulently induced.” (Las Palmas Associates, supra, 235 Cal.App.3d at p. 1238-1239.) Furthermore, Civ. Code § 3294 (a) permits a plaintiff to recover punitive damages “where it is proven by clear and convincing evidence that the defendant has been guilty of oppression, fraud or malice . . . .” For the purposes of a punitive damages award, “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.” (See Cal. Civ. Code § 3294(c)(3).) Here, NC Dynamics has alleged facts sufficient to show that TMG’s running time misrepresentations caused the loss of the Bombardier contract. Accordingly, the Motion to Strike is DENIED.

^{^[1]} NC Dynamics cites N. Nat. Gas Co. v. Superior Ct. (1976) 62 Cal.App.3d 983 for the proposition that because a company acts through its employees, its employees’ knowledge may be imputed to the company. However, that case concerns agency law and, as set forth within, confuses the issue.