Judge: Timothy Patrick Dillon, Case: 22STCV25204, Date: 2023-03-07 Tentative Ruling

Case Number: 22STCV25204    Hearing Date: March 7, 2023    Dept: 73

Culberson-Stowers Inc., et al. v. Toyota Motor Credit Corporation, et al. 

Counsel for Defendant (Movant): Elissa M. McClure

Counsel for Plaintiffs (Responding Party): Jonathan A. Michaels, Mathew Van Fleet, and Robert B. Smith

DEMURRER TO PLAINTIFFS’ FIRST AMENDED COMPLAINT WITHOUT MOTION TO STRIKE (filed 12/06/2022)

TENTATIVE RULING

The Demurrer is sustained with leave to amend as to the third and fifth causes of action, and overruled as to the first, second, and fourth causes of action.

I.      Background

On August 4, 2022, Plaintiffs filed a complaint against Defendant and Does 1-25, inclusive.

On September 12, 2022, Defendant filed a demurrer to the complaint, which was rendered moot by Plaintiffs’ filing of the First Amended Complaint (“FAC”) on October 19, 2022.  Plaintiffs allege the following:

1. Breach of Contract;

2. Breach of Implied Covenant of Good Faith and Fair Dealing;

3. Civil Conspiracy – Fraud;

4. Violation of California Commercial Code; and

5. Conversion

On December 6, 2022, Defendant filed this instant demurrer to the FAC., arguing:

·         That the Court should sustain without leave to amend Plaintiff’s FAC as to all five causes of action for failure to state a cause of action.

·         Plaintiff cannot state a cause of action for breach of contract and breach of the implied covenant of good faith and fair dealing because: (1) Plaintiffs concede that they failed to perform their own contractual obligations, and (2) the Loan Agreements, which are annexed to the FAC, contain broad releases, which preclude Plaintiffs from suing Defendants for breach of those Agreements.

·         Plaintiff cannot state a cause of action for fraud and conversion because they are barred by the applicable three-year statute of limitations set forth in section 338 of the Code of Civil Procedure, and Plaintiffs allege no viable basis for tolling or delayed discovery. Additionally, Plaintiffs fail to plead fraud with the requisite particularity.

·         Plaintiffs cannot state a cause of action for conversion because Plaintiffs do not and cannot allege their right to possession of the purportedly converted property, which property Defendant had a right to sell in foreclosure pursuant to the Loan Agreements.

·         Plaintiffs cannot state a cause of action for violation of the Commercial Code because Plaintiffs’ allegation of market value constitutes a sham pleading. Additionally, Plaintiffs waived any claim arising from commercial unreasonableness of the foreclosure sale in the Forbearance Agreements annexed to the FAC.

On February 22, 2023, Plaintiffs filed an opposition, arguing:

·         Defendants’ demurrer is time-barred because Defendant’s deadline to file was November 18, 2022, but Defendant did not file the instant demurrer on December 6, 2022.

·         The language contained in the 3rd Amendment to the Forbearance Agreement did not and could not have waived the prospective future claims related to the Inventory Loan and the Third Amendment alleged against Defendant in the FAC. The FAC alleges that Plaintiffs’ claims accrued after the execution of the release language.

·         The FAC states facts sufficient to state causes of action for breach of contract and breach of the implied covenant of good faith and fair dealing.

·         The fraud and conversion causes of action were tolled while pending in Texas and, therefore, the statute of limitations had not run and Plaintiffs’ claims were timely filed in California. The FAC states facts sufficient to constitute causes of action for fraud and conversion;

·         The FAC clarifies allegations of the Complaint and therefore is not a “sham pleading.”

·         The FAC allegations relating to the commercial reasonableness of TMCC’s disposition of the Collateral is a question of fact for the jury. Plaintiffs have a right to the foreclosed collateral and surplus proceeds from the sale of the collateral.

On February 28, 2023, Defendant filed a reply, arguing:

·         Plaintiffs failed to serve their FAC in accordance with the applicable procedural rules and the Court thus deemed the FAC as having been served on November 2, 2022, ordering: "Defendant has statutory time to answer." (See Minute Order, Nov. 2, 2022.) Because Plaintiffs served the FAC electronically (see Proof of Service, Oct. 27, 2022), TMCC had until December 6, 2022 to respond. (See Code Civ. Proc. §§ 471.5, subd. (a); 1010.6, subd. (a)(3)(B).)

·         Plaintiffs fail to show that the contractual releases do not bar their first, second, fourth, and fifth causes of action, and they cannot show that they can amend their claims to avoid the releases. The release language did not release claims accruing after the date of the Third Amendment’s execution.

·         Plaintiffs do not allege performance of their obligations for the agreements from which their contract claims arise, which is a requisite element of their contract-based claims, without which the claims must be dismissed.

·         Plaintiffs fail to show any entitlement to equitable tolling for their fraud and conversion causes of action.

·         Plaintiffs fail to show that they plead conspiracy to commit fraud with the requisite particularity or can amend to do so.

·         Plaintiffs do not plead a legally cognizable commercial code violation, an issue properly decided on demurrer.

II. Discussion

A.      Legal Standard for Demurrer

            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.  (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.  (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.  (Cal. Civ. Proc. Code §§ 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 147 Cal.App.4th at 747.)

B.      Analysis upon Demurrer to FAC

1.                  Untimeliness of Demurrer

California Code of Civil Procedure § 430.40(a) provides that “[a] person against whom a

complaint or cross complaint has been filed may, within 30 days after service of the complaint

… demur to the complaint ….” Here, Plaintiffs served the FAC on Defendants via email on

October 19, 2022. Accordingly, they had until November 18, 2022, to file a demurrer, which

they failed to do. Instead, they untimely filed it on December 6, 2022. However, in its discretion, the Court will consider the merits of Defendant’s demurrer.

2.                  First Cause of Action: Breach of Contract

Defendant argues that Plaintiffs fail to state either a contract-based or a foreclosure-based cause of action because the Loan Agreements, which govern the foreclosure sale, contain broad releases, precluding Plaintiffs from suing for any alleged breaches or wrongdoing in connection therewith, precluding Plaintiffs’ first, second, fourth, and fifth causes of action (i.e., for breach of contract, breach of the implied covenant of good faith and fair dealing, violation of the Commercial Code, and conversion).  Specifically, Plaintiffs allege their breach-of-contract claim specifically arises from the Inventory Loan and the Third Amendment to Forbearance Agreement (FAC ¶¶ 41, 46), each of which contains a release precluding such claims.

            In opposition, Plaintiffs argue they never released the claims alleged in the FAC because the Third Amendment states that Plaintiffs agree to release claims which they now have or might have as of the effective date of the Third Amendment, which was October 31, 2018.  Plaintiffs claim that the release language did not release claims accruing after the date of the Third Amendment’s execution, and that since their claims accrued after the waiver and release language were executed, the first, second, fourth, and fifth causes of action are not precluded.  Plaintiffs also contend that the waiver and release language is unenforceable because Plaintiffs’ assent was induced by Defendants’ misrepresentations.  Plaintiffs argue they relied on Defendant’s representations that it would strictly comply with the UCC when conducting the Foreclosure Sale, so they agreed to the waiver and release language. 

            In reply, Defendant points out that the Third Amendment unambiguously states that Plaintiffs will release future claims since it refers to claims they now have or might have.  Defendant also argues that Plaintiffs cannot rely on fraud to render the waiver unenforceable since Plaintiffs do not allege that they were unaware of the nature or contents of the parties’ agreements nor that Defendant owed them any fiduciary obligations, to support either fraud in the inception or misrepresentations by a fiduciary.  Additionally, Defendant argues that fraudulent nondisclosure does not apply since the parties’ other agreements also contained broad releases, Plaintiffs’ allege that Defendant violated the Commercial Code one week after the execution of the Third Amendment such that fraudulent nondisclosure could not apply when significant facts were not actually known to Defendant, and Plaintiffs do not plead a cognizable Commercial Code violation. 

            The Court finds that while Plaintiffs may have released claims pertaining to conduct that occurred in the past and that this may bar certain of Plaintiffs’, on this demurrer the can not find they  released conduct that occurred after the third amendment, October 31, 2018.  Here, the foreclosure sale occurred after October 31, 2018.  The third amendment provides that Plaintiff agrees to release claims known and unknown claims at the time of release, not future conduct.  Thus, the Court finds this to be insufficient grounds to sustain the demurrer as to this cause of action.

The elements for breach of contract cause of action are: (1) existence of contract; (2) plaintiff’s performance or excuse for nonperformance; (3) defendant’s breach (or anticipatory breach); and (4) resulting damage.  (Wall Street Network, Ltd. v. N. Y. Times Co. (2008) 164 Cal.App.4th 1171, 1178.)

The Court finds that Plaintiffs sufficiently allege their performance or excuse for nonperformance of the contract in the FAC.  As Plaintiffs point out, nonpayment and breach is the very reason for the foreclosure sale and the alleged misconduct. Here, the forbearance agreement and amendments are based on non-payment.  Thus, the Court finds that Plaintiffs have sufficiently alleged facts to support a cause of action for breach of contract given that this is a breach situation and that the lawsuit is based on a breach of the underlining loan agreements.   

Accordingly, the Court OVERRULES Defendant’s demurrer as to the first cause of action. 

3.                  Second Cause of Action: Breach of Implied Covenant of Good Faith and Fair Dealing

As discussed above, the Court finds that Plaintiffs have not released their claims pertaining to future conduct.

“ ‘The [implied] covenant of good faith and fair dealing [is] implied by law in every contract.’  [Citation.]  The covenant is read into contracts and functions ‘as a supplement to the express contractual covenants, to prevent a contracting party from engaging in conduct which (while not technically transgressing the express covenants) frustrates the other party’s rights to the benefits of the contract.’  [Citation.]  The covenant also requires each party to do everything the contract presupposes the party will do to accomplish the agreement’s purposes.  [Citation.]  A breach of the implied covenant of good faith is a breach of the contract [citation], and ‘breach of a specific provision of the contract is not…necessary’ to a claim for breach of the implied covenant of good faith and fair dealing [citation].”  (Thrifty Payless, Inc. v. The Americana at Brand, LLC (2013) 218 Cal.App.4th 1230, 1244.) (Emphasis in original.)  Plaintiff’s allegations must show “that the conduct of the defendant, whether or not it also constitutes a breach of a consensual contract term, demonstrates a failure or refusal to discharge contractual responsibilities, prompted not by an honest mistake, bad judgment or negligence but rather by a conscious and deliberate act, which unfairly frustrates the agreed common purposes and disappoints the reasonable expectations of the other party thereby depriving that party of the benefits of the agreement. Just what conduct will meet this criteria will depend on the contractual purposes and reasonably justified expectations of the parties.”  (Careau & Co. v. Security Pacific Business Credit, Inc. (1990) 222 Cal.App.3d 1371, 1395.) 

“The prerequisite for any action for breach of the implied covenant of good faith and fair dealing is the existence of a contractual relationship between the parties, since the covenant is an implied term in the contract.”  (Smith v. City and County of San Francisco (2002) 225 Cal.App.3d 48-49.)  

As discussed above, Plaintiffs allege sufficient facts to satisfy the element of their full performance or excuse for nonperformance of the contract. Plaintiffs adequately state a cause of action. 

            Accordingly, the Court OVERRULES Defendant’s demurrer as to the second cause of action.

4.                  Third Cause of Action: Civil Conspiracy – Fraud

Defendant argues the third and fifth causes of action are time barred by the three-year statute of limitations since the facts giving rise to these causes of action occurred before August 4, 2019.  Plaintiffs allege that the actionable misrepresentations occurred “[o]n or around June 15th, 2018[.]”  (FAC ¶ 51.)  Defendant contends that Plaintiffs’ efforts to sue Defendant in Texas does not invoke the doctrine of equitable tolling because Plaintiffs did not allege any fraud cause of action against Defendant but only alleged such a claim against other parties.  Moreover, Defendant argues that Plaintiffs’ fraud allegations against the other parties in the Texas lawsuit did not apprise Defendant of Plaintiffs’ intent to allege fraud against Defendant in the instant action.  However, even if Plaintiffs’ claim is not time barred, Defendant contends that Plaintiffs failed to allege fraud with requisite particularity because their allegations of misrepresentation are devoid of any specificity regarding how, when, where, to whom, and by what means the representations were tendered.

In opposition, Plaintiffs argue that Plaintiffs’ claims were tolled while pending in Texas because Plaintiffs alleged a civil conspiracy cause of action against Defendant in the Texas lawsuit such that Defendant was put on notice of Plaintiffs’ claims.  Additionally, Plaintiffs argue that Defendant has not been prejudiced by the filing of this lawsuit because Defendant was the one who moved the case pursuant to the Mandatory Forum Selection Clause.  Finally, Plaintiffs argue they acted in good faith by filing this lawsuit in Los Angeles County upon Defendant’s motion and as the Texas Court instructed.  As to the fraud allegations, Plaintiffs argue that they have pled with specificity.  However, Plaintiffs argue that even if they did not allege the “who, what and how”, for a fraud cause of action, Defendant’s demurrer fails because when the details of an alleged fraud are more within the knowledge of the defendant than the plaintiff, the requirement of pleading fraud with specificity is relaxed.

In reply, Defendant argues that Plaintiff’s prior cause of action for conspiracy in the Texas lawsuit arose from Defendant’s purported failure to use commercially reasonable practices in the foreclosure sale, which does not give rise to Plaintiffs’ instant cause of action for fraud.  Defendant argues that because the Texas Lawsuit did not allege that Defendant conspired in fraud by failing to intervene in 805 Hobart’s mismanagement of the Dealership, Defendant would have no reason to investigate those facts, and equitable tolling does not apply.  Defendant points out that Plaintiffs acknowledge that they did not allege (1) to whom Mr. Johnson spoke, and (2) whether the misrepresentations were oral or in writing but identify no allegations supplying those facts.  (Opp. at p. 13.)  Defendant notes that Plaintiffs do not dispute that such allegations are integral, further dooming their claim, and Plaintiffs meet their burden of showing ability to allege such facts. 

On this demurrer, the Court finds that Plaintiffs’ third cause of action for conspiracy to commit fraud is not time barred because Plaintiffs sufficiently show that Defendant was put on notice of Plaintiffs’ claims despite not bringing a specific cause of action for fraud in the Texas lawsuit.  Plaintiffs are not required to bring the precise cause of action in order for Defendant to be put on notice.  In the Texas lawsuit, in paragraph 43 of their second amended petition, Plaintiffs alleged civil conspiracy against Defendant, “including fraud” (“civil conspiracy to defraud Plaintiffs”). Plaintiffs also alleged deceptive trade practices under the Texas statute in the Texas lawsuit.  The Court finds this sufficient to give Defendant notice of Plaintiffs’ claim for civil conspiracy–fraud as alleged here.

 “ ‘Conspiracy is not a cause of action, but a legal doctrine that imposes liability on persons who, although not actually committing a tort themselves, share with the immediate tortfeasors a common plan or design in its perpetration.’  [Citation.]  A civil conspiracy ‘must be activated by the commission of an actual tort.’  [Citation.]”  (AREI II Cases (2013) 216 Cal.App.4th 1004, 1021.)  “To support a conspiracy claim, a plaintiff must allege the following elements: ‘(1) the formation and operation of the conspiracy, (2) wrongful conduct in furtherance of the conspiracy, and (3) damages arising from the wrongful conduct.’ ”  (Id. at p. 1022.)

“The elements of common law fraud are: ‘(1) a misrepresentation (false representation, concealment, or nondisclosure); (2) knowledge of falsity (or scienter); (3) intent to defraud, i.e., to induce reliance; (4) justifiable reliance; and (5) resulting damage.’ ”  (AREI II Cases, supra, 216 Cal.App. 4th at p. 1021-1022.)

As to conspiracy, Defendant argues that Plaintiffs fail to allege any specific facts to satisfy the elements for conspiracy.  Defendant argues that Plaintiffs do not allege that Defendant knew of Mr. Johnson’s alleged misrepresentations in the negotiation of the Management Agreement, nor that Defendant even knew that a Management Agreement existed.  (FAC ¶¶ 60-61.)  Defendant points to Plaintiffs’ allegation that “[Defendant] witnessed first-hand 805 Hobart, Inc.’s conduct and allowed it to continue unabated,” however, Defendant argues that knowledge of a tort is insufficient for a conspiracy claim.  (FAC ¶ 59.)  Additionally, Defendant argues that Plaintiffs’ allegation that Defendant “intended that 805 Hobart, Inc. and Country II’s wrongful acts and harm to Plaintiffs be committed” lacks plausibility because in the Loan Agreements, any money made by Defendant in its foreclosure of the collateral property would compensate for Plaintiffs’ outstanding debt obligation.  (Id. at ¶ 61.)  Thus, it would not make sense to imply that Defendant would reduce its own recovery for the sake of benefitting the unrelated Johnson Entities.

In opposition, Plaintiff claims that Defendant knew of Mr. Johnson’s misrepresentations in the negotiations of the Management Agreement since Defendant expressly acknowledged the Management Agreement between Plaintiffs and 805 Hobart, Inc. at paragraph C of the Recitals of the First Amendment to the Forbearance Agreement.  (FAC, Exhib. 4 ¶ D.)  Additionally, Plaintiffs argue that the FAC alleges that Defendant began communicating directly with 805 Hobart, Inc. and Country II and had knowledge of 805 Hobart, Inc.’s wrongful conduct, which is sufficient to show the formation and operation of conspiracy.  (FAC ¶ 22.)  Plaintiffs point to specific allegations in the FAC, which they argue apprises Defendant of the character and type of facts and circumstances upon which Plaintiffs are relying to establish the conspiracy: “[Defendant] knew of and was complicit in 805 Hobart, Inc’s wrongful and illegal acts that harmed Plaintiffs” (FAC ¶ 23); “[Defendant] agreed with, and ratified, 805 Hobart, Inc. and Country II’s wrongful and illegal conduct and intended that 805 Hobart, Inc and Country II’s wrongful acts and harm to Plaintiffs be committed” (FAC ¶ 61); “After agreeing with and ratifying 805 Hobart, Inc and Country II’s wrongful conduct [Defendant] sold the …Collateral… for a grossly inadequate price” (FAC ¶ 62); and  “…[Defendant]’s knowledge of assent to and execution of 805 Hobart, Inc’s plan … Plaintiffs have been damaged.”  (FAC ¶ 63.) 

In reply, Defendant argues that the Recitals of the First Amendment directly contravene Plaintiffs’ allegations of conspiracy, providing: “Lender has not consented to the Management Agreement or the Management Company operating the Dealership on behalf of Borrower and has discovered that the Management Company operating the Dealership may be directing proceeds of the Collateral away from Borrower,” which “could be construed as additional possible violations of the [] Loan Agreement[.]”  (FAC, Exhib. 4 ¶ E.)  Additionally, the First Amendment provides: “Each Obligor acknowledges and agrees (i) that the Management Company is operating the Dealership without influence, management or control by Lender or its agents, employees or representatives[.]”  (Id. ¶ 2(d).)  Defendant also points out the deficiencies in Plaintiffs’ cited paragraphs as conclusory allegations of Defendant’s knowledge and complicity which fail to satisfy the pleading standard at the demurrer stage. 

The Court agrees with Defendant in that the FAC fails to adequately allege the formation and operation of the conspiracy and wrongful conduct.  Plaintiffs’ citation to the FAC which establish conspiracy are insufficient.  Plaintiffs allege that “[Defendant] knew of and was complicit in 805 Hobart, Inc’s wrongful and illegal acts that harmed Plaintiffs” (FAC ¶ 23), but this allegation is devoid of any specific facts which show how Defendant conspired with 805 Hobart, Inc.  Plaintiffs’ other allegations fail for the same reasons.  There are not enough specific allegations to tie Defendant to a conspiracy.  

As to the fraud claim, Defendant argues that Plaintiffs fail to plead fraud with particularity since they do not allege: (1) to whom Mr. Johnson spoke, (2) whether the misrepresentations were made orally or in writing, or (3) whether Mr. Johnson was authorized to speak on behalf of 805 Hobart.

In opposition, Plaintiffs argue that the FAC satisfies each of the elements for fraud: “..John Johnson, in his capacity as President of 805 Hobart Inc. made material representations to Plaintiffs during negotiation of the Management Agreement …” (FAC ¶ 51); “… 805 Hobart, Inc. promised Plaintiffs to act in good faith for (a) managing and supervising the Dealership and (b) making all management and operating decisions, including without limitation decisions concerning sales practices, inventory management and personnel matters…” (FAC ¶ 51); and “Plaintiffs entered into the Management Agreement based on 805 Hobart, LLC’s promise….”” (FAC ¶ 52.)  Plaintiffs also argue that even though they did allege sufficient facts, the pleading requirements for specificity is relaxed when the details of an alleged fraud are within the knowledge of Defendant. 

In reply, Defendant argues that Plaintiffs acknowledge that they do not allege (1) to whom Mr. Johnson spoke, and (2) whether the misrepresentations were oral or in writing, but identify no allegations supplying those facts (Opp. at p. 13.) and that Plaintiffs do not dispute that such allegations are integral (see id.; Demurrer at pp. 21-22), further dooming their claim.

The Court agrees with Defendant’s findings regarding the deficiencies in Plaintiffs’ allegations and finds that Plaintiffs have not alleged fraud with the well-known required specificity. 

Accordingly, the Court SUSTAINS WITH LEAVE TO AMEND Defendant’s demurrer as to the third cause of action. 

5.                  Fourth Cause of Action: Violation of California Commercial Code

As discussed above, the Court finds that Plaintiffs have not released their claims pertaining to future conduct.

            Defendant argues that Plaintiffs’ factual allegations constitute a sham pleading because Plaintiffs inflated their allegations of market value in their FAC in an attempt to allege that Defendant sold the collateral at an inadequate price.  Specifically, Plaintiffs alleged in their initial Complaint that the market value of the foreclosed inventory totaled $1,986,298, and the exhibits to the Complaint showed Country II paid Defendant $2,367,494.30 for such inventory (Complaint, ¶ 27, Ex. 7), such that the purchase price exceeded the market value.  In the FAC, Plaintiffs allege that this inventory was actually worth $3,500,000 at the time of the foreclosure sale, rather than $1,986,298.  (FAC ¶ 29.) 

            In opposition, Plaintiffs argue that the FAC is not a sham pleading because it does not allege facts that conflict with the original complaint.  Plaintiffs argue that the FAC clarifies the value of the entirety of “Collateral” rather than solely two categories of Collateral.  The original complaint alleged that “new and used car inventory was $1,734,647; and the market value of the parts was $251,651.”  (Compl. ¶ 27.)  In the FAC, Plaintiffs do not allege the value of solely the “new and used car inventory” and the value of “parts.”  Plaintiffs allege that the “Collateral”, as defined in paragraph 27 of the FAC and which encompasses all of the collateralized categories, is valued

at “no less than $3,750,000.00.” 

            In reply, Defendant states that it does not abandon its argument regarding Plaintiffs' sham pleading (Demurrer at pp. 22-23), but focuses the limited space in its Reply on the legal unviability of Plaintiffs’ claim, in addition to its preclusion by release.

            The Court finds that Plaintiffs’ argument has merit and the FAC does not constitute sham pleading because Plaintiffs were redefining “Collateral” to encompass more than described in the original complaint. For example, Plaintiffs in the first amended complaint use the term “Collateral” that  includes 10 items. In their original complaint, Plaintiffs described two items (new and used cars and parts). These two are included in item two (“Inventory”) of “Collateral.” The Court finds that Plaintiffs did not inflate their allegations for the mere purpose of alleging that Defendant sold the collateral at an inadequate price. Defendant has not shown sham allegations.  

            Defendant also argues that Plaintiffs’ allegation that property was sold at an inadequate price, without more, does not state a cognizable claim under the Commercial Code.  “The fact that a greater amount could have been obtained” by “disposition [of collateral] … at a different time or in a different method from that selected by the secured party is not of itself sufficient to preclude the secured party from establishing that the … disposition … was made in a commercially reasonable manner.”  (Com. Code § 9627, subd. (a).)  Defendant contends that Plaintiffs do not allege that the foreclosure sale did not occur in the usual manner on any recognized market; that the purported “grossly inadequate price” was unacceptable in any recognized market; nor that the foreclosure sale failed to conform with reasonable commercial practices among dealers.  (Com. Code § 9627, subd. (b).)  Additionally, Defendant points out that Plaintiffs cannot cure this failure because any such allegations would contravene the Third Amendment to the Forbearance Agreement, in which Plaintiffs expressly acknowledged:

Lender [i.e., TMCC] has been and will continue (i) to negotiate the terms under which Buyer [i.e., the Johnson Entities] may purchase the Dealership assets at the Foreclosure Sale, (ii) to contact creditors which have provided notice to Lender that there are debts owed to them, (iii) to collect and share necessary information related to the Dealership or in connection with the Loans in order to conduct the Foreclosure Sale, and (iv) take the steps required to conduct the Foreclosure Sale (whether the sale is to Buyer or any other party)[.]

(Third Amendment to the Forbearance Agreement, ¶ 2(e).)  Additionally, Defendant notes that Plaintiffs also agreed: “Lender may take any action it deems necessary or which is required under the UCC to conduct the Foreclosure Sale as soon as practicable after November 1, 2018." (Id., ¶ 4.)

            In opposition, Plaintiff argues that whether a sale of collateral is conducted in a commercially reasonable manner is generally a question of fact.  Plaintiff also contends that the, question of whether

there is “recognized market” for any particular collateral, within meaning of Uniform Commercial Code (UCC) section providing that notice of sale or disposition of collateral need not be given to debtor if collateral is of type customarily sold on “recognized market,” is generally question of fact.

            In reply, Defendant argues that Plaintiffs’ allegations of Defendant’s failure to obtain a better price for sale of the collateral does not plead a cognizable claim.  Defendant cites Hutchison v. So. Cal. First Nat. Bank (1972) 27 Cal.App.3d 572, 583, where the Court of Appeal affirmed dismissal of the plaintiff's claim for violation of the Commercial Code without leave to amend where the plaintiff solely alleged that a better price could have been obtained from sale: “[t]he fact the price obtainable on a sale of the pledged [collateral] at the time and in the manner proposed by Blair & Co. would have been better than the price obtained by defendant would not support a finding it did not act in good faith or in a commercially reasonable manner[.]”  Additionally, Defendant argues that the Parties' Agreements,

foreclose further arguments that Defendant violated the Commercial Code for failure to sell the Collateral on a “recognized market” because Plaintiffs consented to the alleged manner of sale, i.e., a private sale to Country II.  (See FAC, ¶ 29; see Loan Agreement, ¶ 7.2(g).)

            The Court finds that Plaintiffs have sufficiently alleged facts regarding the commercial unreasonableness of Defendant’s sale.  The Court agrees with Plaintiffs in that this determination is an issue for later determination.  

            Accordingly, the Court OVERRULES Defendant’s demurrer as to the fourth cause of action. 

6.                  Fifth Cause of Action: Conversion

As discussed above, the Court finds that Plaintiffs have not released their claims pertaining to future conduct.

Additionally, as discussed above, the Court finds that Plaintiffs’ fifth cause of action for conversion is time barred because Plaintiffs fail to show how Defendant was put on notice of Plaintiffs’ claims since they did not bring a cause of action for conversion in the Texas lawsuit.  On this demurrer, the court finds that equitable tolling applies to this cause of action for the reasons described above. 

            Defendant argues that Plaintiffs do not and cannot allege a right to the collateral at the time of the conversion because Plaintiffs allege that the conversion occurred at the time of foreclosure (FAC, ¶¶ 70-73), yet the Loan Agreements annexed to the FAC show that Plaintiffs had no right to the collateral at that time.  (See, e.g., Inventory Loan, ¶ 7(I) [“[Defendant] may retain some or all of the Collateral in either full or partial satisfaction of the Obligations, as determined by [Defendant].”].)

            In opposition, Plaintiffs argue that the collateral was converted because they allege that Defendant did not dispose of the collateral in a commercially reasonable manner, as proscribed by the UCC, the Inventory Loan, the Forbearance Agreement and amendments thereto.  Furthermore, Plaintiffs contend that Defendant converted Plaintiffs’ “surplus proceeds” from a commercially reasonable sale of the collateral.  (See FAC ¶ 72 [“[Defendant] refused to compensate the Plaintiffs the difference between the fair market value(of) the collateral at the time of sale and the sale price of the collateral”].) 

            In reply, Defendant states that because Plaintiffs' claim for conversion is concededly time-barred, Defendant does not address its argument that Plaintiffs fail to allege any cognizable property interest in the converted property, without abandoning it.  In fact, for that latter argument, Defendant states that the sole authority cited in Plaintiffs’ Opposition in support of their purported property rights does not even address a cause of action for conversion, but the mortgagee's ability to maintain an action against the mortgager for deficiency despite failing to comply with the strict terms required for preservation of the lien, which is wholly inapplicable here.

            “Conversion is the wrongful exercise of dominion over the property of another.  The elements of a conversion claim are: (1) the plaintiff's ownership or right to possession of the property; (2) the defendant’s conversion by a wrongful act or disposition of property rights; and (3) damages....”  (Welco Electronics, Inc. v. Mora (2014) 223 Cal.App.4th 202, 208.)  “ ‘Conversion is a strict liability tort.  The foundation of the action rests neither in the knowledge nor the intent of the defendant.  Instead, the tort consists in the breach of an absolute duty; the act of conversion itself is tortious.  Therefore, questions of the defendant's good faith, lack of knowledge, and motive are ordinarily immaterial. [Citations.]’  [Citation.]  The basis of a conversion action ‘ “rests upon the unwarranted interference by defendant with the dominion over the property of the plaintiff from which injury to the latter results.  Therefore, neither good nor bad faith, neither care nor negligence, neither knowledge nor ignorance, are the gist of the action.”  Citations.]’  [Citation.]”  (Los Angeles Federal Credit Union v. Madatyan, supra, 209 Cal.App.4th at p. 1387, 147 Cal.Rptr.3d 768; see PCO, Inc. v. Christensen, Miller, Fink, Jacobs, Glaser, Weil & Shapiro, LLP (2007) 150 Cal.App.4th 384, 395, 58 Cal.Rptr.3d 516.)  The unauthorized transfer of property constitutes a conversion.  (See 5 Witkin, Summary of Cal. Law (10th ed. 2005) Torts, § 711(2), p. 1035 (Witkin).)  Money may be the subject of conversion if the claim involves a specific, identifiable sum; it is not necessary that each coin or bill be earmarked.  (Haigler v. Donnelly (1941) 18 Cal.2d 674, 681, 117 P.2d 331.)”  (Id. at p. 208-209.)

            The Court finds that Plaintiffs fail to allege a cause of action for conversion because Plaintiffs did not have had a right to the collateral at the time of foreclosure.  Plaintiffs do not sufficiently address this argument as brought up in Defendant’s moving papers.  Plaintiffs’ argument that the collateral was converted because of Defendant’s failure to dispose in a commercially reasonable manner fails to address how Plaintiffs were entitled to the collateral at the time of disposal.  The Court also agrees with Defendant’s argument that Plaintiffs’ reliance on the case involving a mortgagee’s ability to maintain an action against a mortgager is inapplicable here and does not address Plaintiffs’ rights to the collateral at the time of foreclosure. The conduct briefly alleged in this cause of action  seems to be covered by fourth cause of action.  

            Accordingly, the Court SUSTAINS WITH LEAVE TO AMEND Defendant’s demurrer as to the fifth cause of action. 

III. Conclusion

            In light of the foregoing, the Court SUSTAINS WITH LEAVE TO AMEND Defendant’s Demurrer as to the third and fifth causes of action and OVERRULES Defendant’s Demurrer as to the first, second, and fourth causes of action. Leave to amend within 15 days.