Judge Timothy Patrick Dillon, Case 21STCV34342 2022-10-13 Tentative Ruling

Judge: Timothy Patrick Dillon, Case: 21STCV34342, Date: 2022-10-13 Tentative Ruling

Steven Liu, individually and derivatively, v. Saratoga Maintenance Corp., et al. (21STCV34342)

Counsel for Defendants/moving party: Pamela Abbott Moore, Nicholas J. Wolfsen (Law Offices of Pamela Abbott Moore)

Counsel for Plaintiff/opposing party: Steven W. Kerekes (Law Offices of Steven Kerekes)

· The request for punitive damages: Paragraphs 48, 60, 71, and Prayers for Relief No. 4 and 6.

This is a derivative action filed by Plaintiff Steven Liu on behalf of Defendant Saratoga Maintenance Corporation (“Saratoga”). Plaintiff originally pursued this action in his individual capacity, (see Case No. 19STCV25459), and alleged seven causes of action against Saratoga, Defendant John Leon, Defendant Frank Macciola, and Defendant Jerry Schmidt (collectively “Defendants”). The seven causes of action included: (1) breach of fiduciary duty – failure to use reasonable care; (2) breach of fiduciary duty – duty of loyalty; (3) fraudulent concealment (4) violation of civil § 5235, to enforce member’s right to production and inspection of HOA records; (5) violation of the Covenants, Conditions and Restrictions (CC&R), Article VII, Section V; (6) violation of Civil Code § 5515, and (7) violation of Corp. Code § 5145.

On the eve of trial, pursuant to an oral request made by Plaintiff, the court dismissed the entire action without prejudice. (09/09/21 Order – Dismissal, Case No. 19STCV25459.) On September 16, 2021, Plaintiff refiled the instant action reasserting all seven causes of action. With the exception of the fourth cause of action, all previous causes of action were realleged derivatively. Additionally, Plaintiff included two new claims: (1) Derivative Action for Declaratory Relief, and (2) Declaratory Relief.

A summary of the underlying events according to Plaintiff is as follows. Saratoga is a homeowners’ association and Defendants Leon, Macciola, and Schmidt served as its Board of Directors. (Complaint ¶ 1.) On or around August 19, 2015, Defendants terminated a contract with a licensed landscaping company and hired Alberto Marquez (“Marquez”), an employee of the landscaping company, to perform landscaping work at higher cost and with fewer services provided. (Complaint ¶ 18.) As a result, annual landscaping costs for Saratoga members increased from $30,251 to $35,065. (Complaint ¶ 21.) After Marquez completed one year of work, Defendants, without discussion or approval from homeowners, increased Marquez’s monthly fee by twenty percent. (Complaint ¶ 23.) Leading up to and throughout this period, Leon made unauthorized and undocumented payments to Marquez on behalf of Saratoga for landscaping services rendered and then sought reimbursement. (Complaint ¶ 18-19, 25.) Consequently, Plaintiff, other homeowners, and Saratoga have been financially harmed. (Complaint ¶ 32.)

On September 6, 2022, Defendants filed a Demurrer and Motion to Strike the refiled Complaint. Plaintiff filed opposition on September 30, 2022, and Defendant replied on October 5, 2022.

Code of Civil Procedure §§ 430.4 (a), and 435.5 (a), require meeting and conferring “in person or by telephone” at least five days before filing a demurrer or motion to strike. Defendants’ counsel declares that he telephoned Plaintiff’s counsel on August 25, 2022, to discuss the grounds of the demurrer and motion to strike. (Wolfsen Decl. Regarding Compliance, ¶ 3.) Defendants’ counsel and Plaintiff’s counsel could not reach agreement on the issues and Defendants filed the instant demurrer and motion to strike on September 6, 2022. Accordingly, the Court finds that Defendants’ meet-and-confer efforts were sufficient.

Courts may take judicial notice of regulations and legislative enactments issued by any public entity in the United States or of records of any court of this state. Cal. Evid. Code §§ 452(d)(1) and 452(e)(1). When the ground of demurrer is based on a matter of which the court may take judicial notice pursuant to Section 452 or 453 of the Evidence Code, such matter shall be specified in the demurrer, or in the supporting points and authorities for the purpose of invoking such notice. CCP § 430.70.

1. Exhibit A: Complaint filed in Superior Court of Los Angeles as Case Number: 19STCV25459.

2. Exhibit B: Complaint filed in Superior Court of Los Angeles as Case Number 17AHSC05898.

Exhibits A and B are court records of prior actions prosecuted by Plaintiff and which form the basis for Defendants’ instant Demurrer and Motion to Strike. Thus, judicial notice of these records is appropriate.

1. Exhibit A: Defendants’ Motion for an Order Requiring the Posting of a Bond fled in the Instant Action on or about October 21, 2021.

2. Exhibit B: Plaintiff’s Opposition to Motion for an Order Requiring the Posting of a Bond, without the exhibits, filed in the instant action on March 2, 2022.

3. Exhibit C: Defendant’s Reply in Support of Motion for an Order Requiring the Posting of a Bond filed in the instant action on or about March 9, 2022.

4. Exhibit D: The Court’s Minute Order Denying Motion for Bond in the instant case dated March 23, 2022.

Judicial notice as to Plaintiff’s requested records is also appropriate. Exhibits A-D are court records filed by the instant parties in connection with this case. Exhibit E is a civil jury instruction issued by the Judicial Council of California, a public entity, and sets forth the elements of fraudulent concealment, which is Plaintiff’s third cause of action.

Defendants demur to the Complaint in its entirety because it fails to state facts sufficient to constitute a cause of action.^{^[1]} Central to this contention is Defendants’ insistence that Plaintiff’s claims are time-barred because the equitable tolling doctrine does not apply.

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 context—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 pleading alone, and not the evidence or facts alleged.” (E-Fab, Inc. v. Accountants, Inc. Servs. (2007) 153 Cal.App.4th 1308, 1315.) As such, the court assumes the truth of the complaint’s properly pleaded or implied factual allegations. (Id.) 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 p. 747.)

The first and second causes of action are based upon breach of fiduciary duty. Defendants argue anew that the first and second causes of action are time-barred. (See Plaintiff’s Request for Judicial Notice, Exs. A and C.)

Under Civ. Proc. Code § 343, the statute of limitations for a breach of fiduciary duty claim is four years. Because Plaintiff refiled the instant action on September 16, 2021, Defendants contend any allegations that Defendants breached their fiduciary duty prior to September 16, 2017, are beyond the statute of limitations. Plaintiff opposes on two grounds.^{^[2]} First, the doctrine of equitable tolling applies. Second, because Plaintiff discovered facts in support of his breach of fiduciary duty claims only after filing the original complaint on July 19, 2019, the breach of fiduciary duty claims are subject to a statute of limitations of three years from the date of discovery pursuant to CCP § 338(d).

The parties strongly disagree as to the applicable prerequisites for equitable tolling. “Equitable tolling is a judge-made doctrine which operates independently of the literal wording of the Code of Civil Procedure to suspend or extend a statute of limitations as necessary to ensure fundamental practicality and fairness.” (Lantzy v. Centex Homes (2003) 31 Cal.4th 363, 370.) (Quotations omitted.) The doctrine usually applies “[w]hen an injured person has several legal remedies and, reasonably and in good faith, pursues one.” (McDonald v. Antelope Valley Community College Dist. (2008) 45 Cal.4th 88, 100).) (Citations and quotations omitted.) The doctrine applies occasionally and in special situations to soften the harsh impact of technical rules which might otherwise prevent a good faith litigant from having a day in court. (Saint Francis Memorial Hospital v. State Department of Public Health (2020) 9 Cal.5th 710, 719.) (Quotations omitted.)

Application of the doctrine of equitable tolling requires (1) timely notice to defendants in filing the first claim; (2) lack of prejudice to the defendants in gathering evidence to defend against the second claim; and (3) good faith and reasonable conduct by plaintiff in filing the second claim. (Addison v. State of California (1978) 21 Cal.3d 313, 318-319; Tarkington v. California Unemployment Ins. Appeals Bd. (2009) 172 Cal.App.4th 1494, 1503.) Plaintiff argues that this is the applicable analysis.

Defendants argue that the analysis is different in cases where a plaintiff requests equitable tolling not based on pursuit of one legal theory over another. In that context, a plaintiff must assert (1) a claim of error on the part of the court; (2) delay or dilatory tactics on the part of defendant; and (3) diligent pursuit of the action on the part of the plaintiff. (Wood v. Elling Corp. (1977) 20 Cal.3d 353, 361; Bollinger v. National Fire Ins. Co. (1944) 25 Cal.2d 399, 403-406.)

Both tests originate in Bollinger. Since then, and confusingly so, the framework argued for by Defendants has been held to be concurrent, (see Wood, supra, 20 Cal.3d at p. 361 (requiring existence of all three factors as essential to application of the rule)) and as disjunctive (see Scharer v. San Luis Rey Equine Hospital, Inc. (2012) 204 Cal.App.4th 421, 431 (plaintiff must “demonstrate that he or she was prevented from [pursuing a claim in a timely manner] by improper action of the court or the defendants”); Hu v. Silgan Containers Corp. (1999) 70 Cal.App.4th 1261, 1271 (describing the element crucial to invoking equitable tolling as either a claim of error on the part of the court or delay or dilatory tactics on the part of the defendant).)

The Court agrees with Plaintiff. At the eve of trial in the lead case (Case No. 19STCV25459), Plaintiff had the option of seeking leave to amend and to file a First Amended Complaint or to voluntarily dismiss the complaint without prejudice. Plaintiff chose the latter option (09/09/21 Minute Order – 19STCV25459) and refiled the instant Complaint as a derivative action seven days later. To be sure, “voluntary abandonment [of an action] does not categorically bar application of equitable tolling.” (McDonald v. Antelope Valley Community College Dist. (2008) 45 Cal.4th 88, 111.)

As such, the Court finds that under the unique circumstances here the applicable analysis to invoke equitable tolling is (1) timely notice to defendants in filing the first claim; (2) lack of prejudice to the defendants in gathering evidence to defend against the second claim; and (3) good faith and reasonable conduct by plaintiff in filing the second claim. (Addison, supra, 21 Cal.3d at pp. 318-319.) Under this discussion, Defendants do not and cannot argue having not received timely notice as Plaintiff filed the first claim within the statute of limitations. Nor do Defendants claim having suffered prejudice. The instant Complaint and the complaint from the lead case are nearly identical such that Defendants would not need to gather additional or different evidence to defend against the second claim. Last, Plaintiff diligently pursued the action in the lead case, and quickly refiled the Complaint when its defects were made known. In the first action, Defendants did not raise any objection to the case proceeding as an individual action until right before trial. It is unclear why Defendants did not the raise the issue sooner. All this could have been avoided.^{^[3]}

The Court acknowledges that Defendants present strong arguments that may ultimately prevail. However, at this early stage of this action, the policy underpinning the equitable tolling doctrine exists for a scenario such as this—to “soften the harsh impact of technical rules” where Plaintiff has diligently pursued an action and Defendants waited until the eve of trial to raise the defects of the original complaint. (Saint Francis, supra, 9 Cal.5th at p. 719.)

Accordingly, the Court OVERRULES the Demurrer as to causes of action one through seven based on statute of limitations grounds.

“The elements of a cause of action for breach of fiduciary duty are the existence of a fiduciary relationship, breach of fiduciary duty, and damages.” (Oasis West Realty, LLC v. Goldman (2011) 51 Cal.4th 811, 820.) Defendants expend their time on the equitable tolling argument which, for the reasons stated above, the court overrules. In pursuing that argument, Defendants stated that the statute of limitations would serve to bar claims for breach of fiduciary duty prior to September 16, 2017. (Demurrer, p. 18, lns. 18-20.) Defendants implicitly accept that the Plaintiff has stated facts sufficient to state claims for breaches of fiduciary duty. Accordingly, the Court OVERRULES the Demurrer to the extent that Defendants challenge the sufficiency of facts alleged to state a claim as to the first and second causes of action.

The elements of a cause of action for fraudulent concealment are: (1) concealment of a material fact; (2) by a defendant with a duty to disclose; (3) the defendant intended to defraud by failing to disclose; (4) plaintiff was unaware of the fact and would not have acted as it did had it known the fact; and (5) damages. (Hambrick v. Healthcare Partners Medical Group, Inc. (2015) 238 Cal.App.4th 124, 162.) Citing CACI No. 1901, Plaintiffs provide that the sixth element of a fraudulent concealment claim is whether defendants’ concealment was a substantial factor in causing plaintiff’s harm. (Plaintiff’s Request for Judicial Notice, Ex. E.)

Defendants argue that the Complaint does not allege facts with sufficient specificity to state a claim for fraudulent concealment. Moreover, because Plaintiff brings this claim derivatively, in addition to his individual capacity, the real plaintiff is Saratoga. Thus, on its face, a derivative fraudulent concealment claim fails because Plaintiff cannot allege facts to show that that Saratoga did not know of the concealed facts or that Saratoga would have behaved differently if the concealed information had been disclosed. The Court agrees. Accordingly, the Court SUSTAINS the Demurrer as to the derivative portion of the fraudulent concealment claim.

As to the direct fraudulent concealment cause of action, the Court finds that Plaintiff fails to state a claim. Accepting all well-pleaded allegations as true, Plaintiff does not allege facts with sufficient specificity to satisfy the fourth element. Plaintiff identifies paragraph 70 as a fact which goes to the fourth element. However, alleging that plaintiff “was unaware of the extent of the financial abuse . . . and how to prevent further harm to the HOA’s financial condition” does not state how Plaintiff would have behaved differently.

Accordingly, the Court SUSTAINS the Demurrer as to the third cause of action in its entirety.

Plaintiff brings the fourth cause of action as an individual. Civil Code § 5235 states in relevant part

(a) A member may bring an action to enforce that member’s right to inspect and copy the association records. If a court finds that the association unreasonably withheld access to the association records, the court shall award the member reasonable costs and expenses, including reasonable attorney’s fees, and may assess a civil penalty of up to five hundred dollars ($500) for the denial of each separate written request.

(b) (b) A cause of action under this section may be brought in small claims court if the amount of the demand does not exceed the jurisdiction of that court. (Civ. Code § 5235 (b).)

Defendant argues that this claim is barred by the doctrine of res judicata because Plaintiff pursued this claim in small claims court. (See Defendants’ Request for Judicial Notice, Ex. B.; Complaint ¶ 115.) Plaintiff does not meet this argument in its Opposition but alleges in the Complaint that the small claims court did not rule on the merits. (Complaint ¶ 115.)

The Court agrees with Defendants. Res judicata precludes parties or their privies from relitigating a cause of action that has been finally determined by a court of competent jurisdiction. (Rice v. Crow (2007) Cal.App.4th 725, 734.) The small claims court issued a judgment stating that “Defendants Johnny Leon; Saratoga do not owe the plaintiff Steven Liu any money on plaintiffs claim.” Therefore, the Court finds that Plaintiff’s fourth cause of action is precluded from relitigation.

Defendants argue that the fifth (Violation of Saratoga’s Declaration of Covenants, Conditions, and Restrictions (“CC&R”)), sixth (Violation of Civil Code § 5515), and seventh (Derivative and Individual Claim for Violation of Corp. Code §§ 5145^{^[4]} and 7616) causes of action are time-barred because equitable tolling does not apply to Plaintiff. As discussed above, however, the Court finds otherwise.

As to the seventh cause of action, Defendants further argue it is mooted because Saratoga has conducted several elections since Plaintiff submitted his recall petition. Although Plaintiff does not meet this argument in his Opposition, Defendants bring in matter not set forth in the complaint. Civ. Code § 5145 concerns the enforcement of election requirements in homeowners associations and Corp. Code § 7616 concerns the ability of a court to determine the validity of an election. The Court therefore overrules the demurrer because the court must accept the allegations in the complaint as true at this early stage.

Accordingly, the Court OVERRULES the Demurrer as the Fifth and Sixth Causes of Action and OVERRULES the Demurrer as to the Seventh Cause of Action.

Plaintiff requests that the Court determine Marquez’s employment status on the alleged ground that Saratoga has treated Marquez as an independent contractor even though his terms of service indicate that he is an employee. This misclassification, Plaintiff contends, exposes Saratoga to claims by the IRS and the Franchise Tax board for past due employment taxes, fines and penalties. (Complaint ¶ 110.) Upon a finding that Marquez is an employee, Plaintiff further requests the court to declare that the individual defendants are responsible for the payment and indemnification of Saratoga for any tax liability that may result from misclassifying Marquez.

Defendants contend that this request for declaratory relief is not ripe for judicial determination because no actual controversy between Marquez and Saratoga currently exists. Civ. Proc. Code § 1060 requires an “actual controversy” to receive declaratory relief. Moreover, the person who owns or holds title to the claim or property involved, as opposed to others who may be interested or benefited by the litigation, is the real party interest. (Gantman v. United Pac. Ins. Co. (1991) 232 Cal.App.3d 1560, 1566.) The Court agrees with Defendants. No controversy presently exists between Marquez and Saratoga. As such, the Court SUSTAINS the Demurrer as to the eighth cause of action.

Plaintiff also requests the Court to declare that the Saratoga’s assessment of legal fees and costs against Plaintiff for the small claims action is invalid because the small claims court did not rule on the merits nor did Saratoga obtain a court order assessing legal fees or costs. Further, Plaintiff alleges that the small claims court did not award damages because the court thought it lacked jurisdiction. (Complaint 117.) Defendants contend that Defendants prevailed in the small claims action. Thus, pursuant to Art. XX, § 11 of the CC&R, Defendants are entitled to all expenses, costs and damages, to reasonable attorneys’ fees as the prevailing party, whether or not such controversy or claim is litigated and prosecuted to judgment.

The Court agrees with Plaintiff. On demurrer, the court assumes the truth of the complaint’s properly pleaded or implied factual allegations. (E-Fab, Inc., supra,153 Cal.App.4th at p. 1315.) Accordingly, the Court OVERRULES the Demurrer as to the ninth cause of action.

Leave to amend must be allowed where there is a reasonable possibility of successful amendment. (See Goodman v. Kennedy (1976) 18 Cal.3d 335, 349 [court shall not “sustain a demurrer without leave to amend if there is any reasonable possibility that the defect can be cured by amendment”]; Kong v. City of Hawaiian Gardens Redevelopment Agency (2002) 108 Cal.App.4th 1028, 1037 [“A demurrer should not be sustained without leave to amend if the complaint, liberally construed, can state a cause of action under any theory or if there is a reasonable possibility the defect can be cured by amendment.”]; Vaccaro v. Kaiman (1998) 63 Cal.App.4th 761, 768 [“When the defect which justifies striking a complaint is capable of cure, the court should allow leave to amend.”].) The burden is on the complainant to show the Court that a pleading can be amended successfully. (Blank v. Kirwan (1985) 39 Cal.3d 311, 318.)

Because Plaintiff has not yet filed an amended complaint in this action, the Court GRANTS leave to amend as to the third and ninth causes of action. As to the fourth cause of action, res judicata applies. Accordingly, the Court DENIES leave to amend as to the fourth cause of action.

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.¿ (Civ. Proc. Code § 436.)¿ The grounds for moving to strike must appear on the face of the pleading or by way of judicial notice.¿ (Id. § 437.)¿¿¿

Defendants request the Court to strike the following portions of the Complaint without leave to amend:

· The First, Second, Third, Fifth, Sixth, and Seventh Causes of Action as beyond the statute of limitations.

As stated above, the Court finds that the equitable tolling doctrine applies. Accordingly, the Court DENIES the motion to strike the first, second, third, fifth, sixth, and seventh causes of action on those grounds.

Defendants argue that the Court should strike the eighth cause of action for lack of relevance to the Complaint. However, because the Court finds that Plaintiff fails to allege facts sufficient to state a claim, the motion to strike is MOOT.

Defendants move to strike Plaintiff’s prayer for punitive damages for failure to allege facts sufficient to show malice, oppression or fraud. Plaintiff contends that the Complaint is alleges multiple instances of malice and oppression.

Civ. Code § 3294 (b) permits a plaintiff to recover punitive damages from an employer who was personally guilty of oppression, fraud, or malice. “Malice” means an intent to cause injury or despicable conduct done with a willful and conscious disregard of the rights or safety of another. (Civ. Code § 3294 (b)(1).) “Oppression” means despicable conduct that subjects a person to cruel and unjust hardship in conscious disregard for that person’s rights. “‘Despicable conduct’ is conduct that is so vile, base or contemptible that it would be looked down on and despised by ordinary decent people.” (Scott v. Phoenix Schools, Inc. (2009) 175 Cal.App.4th 702, 715.) A motion to strike punitive damages is properly granted where a plaintiff does not state a prima facie claim for punitive damages, including allegations that defendant is guilty of oppression, fraud or malice.¿ (Turman¿v. Turning Point of Cent. California, Inc.¿(2010) 191 Cal.App.4th 53, 63; Cal. Civ. Code § 3294(a).)

Here, Plaintiff has not pled facts sufficient to support an inference of malice or oppression. Plaintiff has put forth allegations, inter alia, of theft (Complaint ¶¶ 18-27 39, 54); concealment (Complaint ¶¶ 28, 65-68); and misuse of funds (Complaint ¶¶ 29, 88, 91). However, the alleged events do not show “undue hardship” or “despicable conduct.” Accordingly, the Court GRANTS the motion to strike the requests for punitive damages with leave to amend.

The Demurrer is SUSTAINED as to the third, fourth, seventh, and eighth causes of action with leave to amend.

The motion to strike is DENIED as to the first, second, third, fifth, sixth, and seventh causes of action.

^{^[1]} Defendants also demur to the Complaint in its entirety because it is uncertain as to Defendants. A party against whom a complaint has been filed may object by demurrer on the ground that the pleading is uncertain. (Cod. Civ. Proc., § 430.010(f).) However, Defendants but do not explain further the basis for this argument. Moreover, Defendants are able to explain the facts and the elements that are lacking from each cause of action which plainly undercuts any contention that the Complaint fails for uncertainty. Thus, the Court does not consider Defendants’ uncertainty argument further.

^{^[2]} Plaintiff also asserts that because this court previously rejected Defendants’ equitable tolling argument at the hearing for Defendants’ motion to post bond, the court’s ruling becomes the law of the case. However, this argument is meritless. “The law-of-the-case doctrine does not apply to trial court rulings.” (Golden Door Properties, LLC v. Superior Court (2020) 53 Cal.App.5th 733, 788 citing Lawrence v. Ballou (1869) 37 Cal. 518, 521.) Rather, it “deals with the effect of the first appellate decision on the subsequent retrial or appeal: the decision of an appellate court, stating a rule of law necessary to the decision of the case, conclusively establishes that and makes it determinative of the rights of the same parties in any subsequent retrial or appeal in the same case.” (Moroshi v. Pacific Home (2004) 34 Cal.4th 482, 491.) Therefore, the law of the case doctrine is not available to Plaintiff.

^{^[3]} Even if the court applied the equitable tolling test requested by Defendants, that Defendants raised so close to trial that the original complaint needed to be pursued as a derivative action may itself be considered a dilatory tactic satisfying the applicability of equitable tolling. (See Hu, supra, describing the element crucial to invoking equitable tolling as either a claim of error on the part of the court or delay or dilatory tactics on the part of the defendant.)

^{^[4]} Plaintiff miscites to the Corporations Code rather than the Civil Code.