Judge Upinder S. Kalra, Case 21STCV38957 2023-02-07 Tentative Ruling

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RESPONDING PARTY(S): Plaintiff Alexander Cavano, LLC, Diana Randle, Dierdre Watson, Jason E. Turner and J. Turner Law Group, APC

1. An order granting monetary and non-monetary sanctions as to Plaintiffs Cavano, Watson and Randle

On October 21, 2021, Plaintiff Persevero, LLC, Diedre Watson, Alexander Cavano, LLC, and Daina Randle (“Plaintiffs”) filed a complaint against Defendants Kevin Harrington, Michael Lauchlan, Mark Campbell, Joe Parker, Crowdfund, LLC formerly dba Crowdfund Rescue, LLC, Inventure X (“Defendants”.) The complaint alleges seven causes of action: (1) Fraud, (2) Rescission, (3) Violation of CA Bus. & Prof. Code § 17200 et seq., (4) Violation of CA Bus. & Prof. Code § 17500, (5) Conversion, (6) Negligent Misrepresentation, and (7) Breach of Contract. The complaint alleges that Plaintiffs entered into a contract with Defendant InventureX to obtain crowdfunding assistance and expertise. Plaintiffs allege that Defendants did not perform the services promised in the contract.

The current Motion for Sanctions was filed on October 24, 2022. Plaintiff’s Opposition was filed on January 24, 2023. Defendant’s Reply was filed on January 30, 2023.

CCP section 128.7 states that a court may impose sanctions on a party or attorney that presents a pleading, petition, motion, or other similar papers in the following circumstances:

1) the document is presented primarily for an improper purpose, such as to harass or to cause unnecessary delay or needless increase in the cost of litigation.

2) the claims, defenses, and other legal contentions therein are not warranted by existing law or by a nonfrivolous argument for the extension, modification, or reversal of existing law or the establishment of new law.

CCP section 128.7 permits the Court to impose monetary sanctions on an attorney or an unrepresented party that violates any one of these requirements. (Eichenbaum v. Alon (2003) 106 Cal App 4th 967, 976.) In addition, section 128.7 does not require a finding of subjective bad faith; instead it requires only that the Court find that the conduct be objectively unreasonable. (In re Marriage of Reese & Guy (1999) 73 Cal. App. 4th 1214, 1221.)

Under section 128.7, a court may impose sanctions if it concludes a pleading was filed for an improper purpose or was indisputably without merit, either legally or factually. (Bucur v. Ahmad (2016) 244 Cal.App.4th 175, 189–190.) A claim is factually frivolous if it is “not well grounded in fact” and is legally frivolous if it is “not warranted by existing law or a good faith argument for the extension, modification, or reversal of existing law.” (Ibid.) In either case, to obtain sanctions, the moving party must show the party's conduct in asserting the claim was objectively unreasonable. (Ibid.) A claim is objectively unreasonable if “any reasonable attorney would agree that [it] is totally and completely without merit.” (Ibid.) However, “section 128.7 sanctions should be ‘made with restraint’ [Citation], and are not mandatory even if a claim is frivolous.” (Peake v. Underwood (2014) 227 Cal.App.4th 428. at 448.)

In addition, Code of Civil Procedure section 128.7 “contains a safe harbor provision. It requires the party seeking sanctions to serve on the opposing party, without filing or presenting it to the court, a notice of motion specifically describing the sanctionable conduct. Service of the motion initiates a 21-day ‘hold’ or ‘safe harbor’ period. [Citations.] During this time, the offending document may be corrected or withdrawn without penalty. If that occurs, the motion for sanctions ‘‘shall not’’ be filed. [Citations.] By mandating a 21-day safe harbor period to allow correction or withdrawal of an offending document, section 128.7 is designed to be remedial, not punitive. [Citation.]” (Li v. Majestic Industry Hills, LLC (2009) 177 Cal.App.4th 585, 590-591.)

The Court may take judicial notice of the existence of the records, but not the truth of matters asserted in such records. (Sosinsky v. Grant (1992) 6 Cal.App.4th 1548, 1565). As a result, although the court may take judicial notice that the documents exists, the Court may not take judicial notice of the truth of the facts in the documents.

Additionally, Evidence Code only allows the Court to take judicial notice of certain types of documents. The court may take judicial notice of “official acts of the legislative, executive, and judicial departments of the United States and of any state of the United States,” “[r]ecords of (1) any court of this state or (2) any court of record of the United States or of any state of the United States,” and “[f]acts and propositions that are not reasonably subject to dispute and are capable of immediate and accurate determination by resort to sources of reasonably indisputable accuracy.” (Evid. Code § 452, subds. (c), (d), and (h).) The Evidence Code does not allow the Court to take judicial notice of discovery responses or parts of cases, such as depositions.

1. Request for Dismissal without prejudice of Kevin Harrington, entered by Sacramento Co. Superior Court in Case ¹34-2020-283953-CL-BC-GDS

The Declaration of Katja M. Grosch indicates that on September 30, 2022, this motion was served on counsel for Plaintiffs. Additionally, the declaration states that the motion will not be filed until the safe harbor period has lapsed. The current Motion for Sanctions was filed on October 24, 2022.

Defendant contends that the FAC filed by Plaintiffs warrants sanctions for two main reasons. First, the claims asserted by Settled Plaintiffs are frivolous. Second, Plaintiff Deidre Watson has a pending action against the same defendants. Defendant seeks monetary sanctions totaling $7,484.08, based on the expenses incurred thus far. Additionally, Defendant seeks non-monetary sanctions and requests the court strike the FAC as it pertains to Plaintiffs Cavano, Randle, and Watson.

Under CCP § 128.7(b)(2), a party must certify that the claims are no frivolous. Here, Defendants assert that Plaintiff Cavano and Plaintiff Daina Randle both executed a Settlement agreement with Defendants, which indicates that Plaintiff would release Defendant InventureX and all affiliates and related parties, including Kevin Harrington. (Dec. Grosch, Ex. 1 & 2.)

In response, Plaintiffs argue that first, Plaintiff Randle has reached a settlement agreement with all Defendants, including Defendant Harrington. As to Plaintiff Cavano, Plaintiffs argue that because there is growing evidence that Mark Campbell, who signed one of the settlement agreements, does not exist, there is an issue as to whether the agreements are void or voidable.

As to Plaintiff Randle, Defendant Harrington withdraws the request to strike Plaintiff Randle from the FAC, but asserts that monetary sanctions are appropriate. As to Plaintiff Cavano, Defendant contends that the argument about whether Campbell exists is meritless. In the Declaration filed concurrently with the Reply, Michael Lauchlan indicates that he is known by Mark Campbell. Additionally, Defendant argues that the settlement agreement was signed by Scott Talkov, “who adopted the authorized digital signature of InventureX through its authorized signer, Mark Campbell.” (Reply, 3: 6-19; Dec. Talkov ¶ 7-9, filed 1/29/23.)

Defendant contends that Diedre Watson has filed this current claim in violation of 128.7(b)(2), as there is another pending action filed in Sacramento County against the same defendants. Despite Plaintiff Watson attempting to dismiss the case on August 23, 2022, it was denied because the case was stayed pending the completion of arbitration. (Dec. Gorsch, Ex. 4.) Defendant refers to res judicata, but the Court notes that res judicata requires final judgment on the merits. Here, the other matter has been filed, but there is no indication that a final judgment has been rendered. Therefore, Defendant’s argument concerning res judicata is misplaced.

In response, Plaintiff Watson dismissed Defendant Harrington from the Sacramento lawsuit in October 2022. (RJN A, Request for Dismissal without prejudice.) In reply, Defendant withdraws the request to be stricken from the FAC, but still argues that monetary sanctions are proper as Defendant was required to defendant the frivolous claim.

“A claim is factually frivolous if it is ‘not well grounded in fact’ and is legally frivolous if it is ‘not warranted by existing law or a good faith argument for the extension, modification, or reversal of existing law.’ [Citation.] In either case, to obtain sanctions, the moving party must show the party's conduct in asserting the claim was objectively unreasonable. [Citation.] A claim is objectively unreasonable if ‘any reasonable attorney would agree that [it] is totally and completely without merit.’ [Citations.]” (Kumar v. Ramsey (2021) 71 Cal.App.5th 1110, 112, reh'g denied (Dec. 21, 2021.)

“Because our adversary system requires that attorneys and litigants be provided substantial breathing room to develop and assert factual and legal arguments, [section 128.7] sanctions should not be routinely or easily awarded even for a claim that is arguably frivolous” [citation omitted], and instead “should be ‘made with restraint.’ ” (Kumar, supra, 71 Cal.App.5th at 1121.) Previously, this Court determined that as to Plaintiffs Cavano and Randle, sanctions were not appropriate at that time because it was unclear to this Court whether Randle could bring a suit asking for injunctive relief. However, given the fact that Randle has since settled with Defendant and Defendant has withdrawn the request to be stricken from the FAC, sanctions are moot as to Plaintiff Randle. The Court will not award monetary sanctions at this time either. Additionally, as to Plaintiff Cavano’s claim that Mark Campbell is not a real person, the Court also will not impose sanctions at this time as the Declaration of Michael Lauchlan indicates that he uses the name Mark Campbell.

As to Plaintiff Watson, sanctions are not appropriate. As seen by the Request for Judicial Notice, there is no pending lawsuit as to Kevin Harrington, as Ms. Watson requested a dismissal without prejudice as to Defendant Harrington on October 17, 2022.

1. Demurrer as to the 1^st, 3^rd, 7^th, and 10^th causes of action is SUSTAINED, with leave to amend

On May 31, 2022, Defendants Michael Lauchlan and Crowdfund, LLC filed a Demurrer, which was SUSTAINED, with leave to amend.

On Octboer 14, 2022, Defendant Harrington filed the current Demurrer. Plaintiffs’ Opposition was filed on January 25, 2023. Defendant’s Reply was filed on January 30, 2023.

A demurrer for sufficiency tests 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. 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. …. The only issue involved in a demurrer hearing is whether the complaint, as it stands, unconnected with extraneous matters, states a cause of action.” (Hahn 147 Cal.App.4th at 747.)

1. Deidre Watson vs. Crowdfund Rescue, LLC, Superior Court of California for the County of Sacramento Case Number 34-2020-00283953-CL-BC-GDS as of today, October 14, 2022 at 8:20 a.m.

1. Request for Dismissal without prejudice of Kevin Harrington, entered by Sacramento Co. Superior Court in Case ¹34-2020-283953-CL-BC-GDS.

Request for Judicial Notice is DENIED, as to Defendant’s Request, and GRANTED, as to Plaintiffs’ Request.

Prior to filing a demurrer, the demurring party is required to satisfy their meet and confer obligations pursuant to Code of Civ. Proc. §430.41, and demonstrate that they so satisfied their meet and confer obligation by submitting a declaration pursuant to Code of Civ. Proc. §430.41(a)(2) & (3). The Declaration of Katja Grosch indicates that on October 4, 2022, the parties met and conferred over the phone, which resulted in the dismissal of the 5^th, 6^th and 9^th causes of action. (Dec. Grosch ¶ 3.)

Defendant demurs to all eleven causes of action.[1] Between Defendant’s demurrer being filed and Defendants’ reply, Plaintiff Watson and Randle settled as to their claims. Thus, the 2^nd, 4^th, 8th, and 11^th causes of action are mooted. The reply only addresses the 1^st, 3^rd, 7^th, and 10^th causes of action. As to the 5^th and 6^th causes of action, Plaintiffs indicate in their opposition that these two causes of action will be replead against other Defendants, not Defendant Harrington. Lastly, as to the 9^th cause of action, Plaintiffs are removing this cause of action.

Defendant argues that the first cause of action fails because it does not contain the necessary specificity that fraud claims require. The allegations against Defendant, which consist of paragraphs 6, 17, 19-21, 39(b), 40(b), 57(c), and 69, do not contain the requisite “who, what, where, when, and how” information. Moreover, the FAC does not indicate which statements were false, how these statements were directed at Plaintiffs specifically, or why it was reasonable

For Plaintiffs to “invest money in InventureX for help with crowdfunding simply because Harrington said in video posted on websites accessible by the general public that InventureX is the business that he “partnered with…” These statements are “puffery.”

Plaintiffs argue that the cause of action for intentional misrepresentation has been sufficiently pleaded. In the FAC, paragraph 39 states that the Defendants “represented facts about the services they contractually agreed to provide.” Additionally, the FAC, specifically paragraphs 39-44 allege that Defendant made videos “as a part of a fraudulent scheme with the other defendants that did, in fact, induce the Plaintiffs to pay InventureX.” (Opp. 11: 6-10.) Plaintiffs cite to Morgan v. AT&T Wireless Services for the contention that when a claim is based on numerous misrepresentations, the plaintiff can provide “a representative selection of the advertisements or other statements to indicate the language upon which the implied misrepresentations are based." (Morgan v. AT&T Wireless Services, Inc. (2009) 177 Cal.App.4th 1235, 1262 [99 Cal.Rptr.3d 768, 790]

“The elements of fraud, which give rise to the tort action for deceit, are (a) misrepresentation (false representation, concealment, or nondisclosure); (b) knowledge of falsity (or 'scienter'); (c) intent to defraud, i.e., to induce reliance; (d) justifiable reliance; and (e) resulting damage.” (Lazar v. Superior Court (1996) 12 Cal.4th 631, 638.)

“[W]hen averments of fraud are made, the circumstances constituting the alleged fraud must be specific enough to give defendants notice of the particular misconduct so that they can defend against the charge and not just deny that they have done anything wrong.” (Vess v. Ciba–Geigy Corp. USA, 317 F.3d 1097, 1106 (9th Cir.2003) (internal quotations and citations omitted). The allegations “must be accompanied by ‘the who, what, when, where, and how’ of the misconduct charged.” (Arikat v. JP Morgan Chase & Co. (N.D. Cal. 2006) 430 F.Supp.2d 1013, 1022.) 157.)

After a review of the FAC, the Court finds that Plaintiffs have failed to allege specific facts to constitute fraud. The FAC states that Defendant Harrington, in some videos, in 2019 and until January 2020, stated that he partnered with InventureX to provide services and would successfully launch businesses. (FAC ¶ 39.) These types of allegations are conclusory and do not contain the required specificity. Plaintiffs have failed to allege what specific misrepresentations Defendant made to them, and when it was made. In Morgan, the Court of Appeal found fraud was sufficiently pleaded because AT&T’s statements failed to indicate that the improvements made to the phone would render it “useless.” AT&T made specific representations about the phone which would lead to a person to reasonably assume that the new phone would still be supported by AT&T’s network. (Morgan, supra, 177 Cal.App.4^th at 1250.) Here, as Defendant argues, these videos were also made available to the general public and indicated that Defendant partnered with InvetnureX. This is not the same type of representations that were made in Morgan.

Defendant’s argument for the third cause of action are combined with the arguments made for the first cause of action: that the FAC does not contain the required specificity for a fraud claim.

Plaintiffs argue that the FAC pleads that Harrington “created a scheme to lure customers to pay for crowdfunding services that InventureX never delivered.” (Opp. 13: 21-25.) Additionally, the FAC states that Defendant Harrington “worked in concert” with others to create InventureX based on the “false promises that InventureX could and would help entrepreneurs.” (Id. at 25-27, citing to FAC ¶ 52.)

“Promissory fraud or false promise “ ‘is a subspecies of the action for fraud and deceit…The elements of promissory fraud ... are: (1) a promise made regarding a material fact without any intention of performing it; (2) the existence of the intent not to perform at the time the promise was made; (3) intent to deceive or induce the promisee to enter into a transaction; (4) reasonable reliance by the promisee; (5) nonperformance by the party making the promise; and (6) resulting damage to the promise[e].” (Rossberg v. Bank of America, N.A. (2013) 219 Cal.App.4th 1481, 1498 [162 Cal.Rptr.3d 525, 539], as modified on denial of reh'g (Sept. 26, 2013) “As with any other form of fraud, each element of a promissory fraud claim must be alleged with particularity.” (Id.).

“[T]he intent element of promissory fraud entails more than proof of an unkept promise or mere failure of performance. We note also that promissory fraud, like all forms of fraud, requires a showing of justifiable reliance on the defendant's misrepresentation.” (Riverisland Cold Storage, Inc. v. Fresno-Madera Production Credit Assn. (2013) 55 Cal.4th 1169, 1183). 2..

“[W]hen averments of fraud are made, the circumstances constituting the alleged fraud must be specific enough to give defendants notice of the particular misconduct so that they can defend against the charge and not just deny that they have done anything wrong.” Vess v. Ciba–Geigy Corp. USA, 317 F.3d 1097, 1106 (9th Cir.2003) (internal quotations and citations omitted). The allegations “must be accompanied by ‘the who, what, when, where, and how’ of the misconduct charged.” (Arikat v. JP Morgan Chase & Co. (N.D. Cal. 2006) 430 F.Supp.2d 1013, 1022).

After a review of the FAC, the Court finds that, similar to above, Plaintiffs have failed to allege facts with the required specificity for fraud. False promise requires the “who, what, where, when, and how.” The FAC contains a few conclusory allegations about Defendant Harrington stating he was partnering with InventureX and would help entrepreneurs. These allegations are insufficient for a false promise cause of action.

Defendant argues that Plaintiffs have failed to plead all the required elements for negligent misrepresentation. Specifically, Plaintiffs cannot and have not established the element of justifiable reliance. Plaintiffs indicate that they are up and coming entrepreneurs with no prior relationship with Defendant Harrington, but do not allege Defendant made specific statements to Plaintiffs or why it was reasonable to invest in InventureX “simply because Harrington said in video posted on websites accessible by the general public” about partnering with InventureX. Demurrer 12: 1-12.)

Plaintiffs argue that the FAC states that Defendants made “numerous representations regarding the crowdfunding development, marketing, launch services, and products…” (Opp. 16: 1-6, FAC ¶ 107.) Additionally, Plaintiffs argue that if the statements made by Defendant Harrington about InventureX’s successes were false then this claim is valid because Defendant “had no reasonable basis for believing that InventureX was a legitimate business that would actually do crowdfunding campaigns for its customers.” (Opp. 16: 12-15.)

Negligent misrepresentation requires the defendant to make false statements believing them to be true but without reasonable ground for such belief. (Bily¿v. Arthur Young & Co.¿(1992) 3 Cal.4th 370, 407.)¿ “The elements of negligent misrepresentation are (1) the misrepresentation of a past or existing material fact, (2) without reasonable ground for believing it to be true, (3) with intent to induce another’s reliance on the fact misrepresented, (4) justifiable reliance on the misrepresentation, and (5) resulting damage.” ((National Union Fire Ins. Co. of Pittsburgh, PA v. Cambridge Integrated Services Group, Inc.¿(2009) 171 Cal.App.4th 35, 50 [internal quotations omitted].)¿ Negligent representation must be¿pleaded¿“with particularity and by facts that show how, when, where, to whom, and by what means the representations were tendered. " (Charnay¿v.¿Cobert, 145 Cal.App.4th at p. 185, fn. 14 [internal quotations omitted].)

After a review of the FAC, the Court finds that Plaintiffs have failed to allege the required specificity of what misrepresentation was made by Defendant Harrington or when it was made. Again, paragraphs 39 and 40 of the FAC do not contain sufficient allegations of misrepresentations made by Defendant Harrington that would justify a negligent misrepresentation claim. The claims that Defendant Harrington partnered with InventureX and the alleged success rate. This is not adequate for a negligent misrepresentation cause of action.

Defendant contends that the tenth cause of action fails because unjust enrichment “does not lie where, as here, express binding agreements exist and define the parties’ rights.” (California Med. Ass'n, Inc. v. Aetna U.S. Healthcare of California, Inc. (2001) 94 Cal.App.4th 151, 172.) In paragraphs 32, 34, 35, and 36 of the FAC, the parties entered into written contracts. Additionally, because the claim for fraud fails, so to does the claim for unjust enrichment. Plaintiffs argue that restitution can be awarded if the parties entered an express contract that was procedure by fraud or is unenforceable. Plaintiff likens this matter to Rutherford, as this case involves express agreements and a “plaintiff’s allegations that the defendant wrongfully or intentionally decided not to perform under those express agreements.” (Opp. 18: 3-9, referencing (Rutherford Holdings, LLC v. Plaza Del Rey (2014) 223 Cal.App.4th 221).)

While unjust enrichment is not a cause of action, courts have stated that unjust enrichment is synonymous with restitution and allowed recovery where the plaintiff asserts a proper basis for recovering restitution.¿(See¿Durrell v. Sharp Healthcare¿(2010) 183 Cal.App.4th 1350, 1370;¿McBride v.¿Boughton¿(2004) 123 Cal.App.4th 379, 387-88.) “The elements for a claim of unjust enrichment are ‘receipt of a benefit and unjust retention of the benefit at the expense of another.’ [Citation.] ‘The theory of unjust enrichment requires one who acquires a benefit which may not justly be retained, to return either the thing or its equivalent to the aggrieved party so as not to be unjustly enriched.” (Lyles v. Sangadeo-Patel (2014) 225 Cal.App.4th 759, 769.)

Here, the complaint does not sufficiently allege a cause of action for unjust enrichment. While Rutherford allows for unjust enrichment causes of action based on express agreements, like here, the Plaintiffs have failed to adequate allege fraud. As stated above, the complaint does not contain the required specificity for fraud. Because the first cause of action for fraud fails, the claim for unjust enrichment fails.

Leave to amend should be liberally granted if there is a reasonable possibility an amendment could cure the defect. (County of Santa Clara v. Superior Court (2022) 77 Cal.App.5th 1018,1035.) The Plaintiff has the burden of demonstrating that leave to amend should be granted. (Goodman v. Kennedy (1976) 18 Cal.3d 335, 349 [“Plaintiff must show in what manner he can amend his complaint and how that amendment will change the legal effect of his pleading.”].) Plaintiffs refer to Redfearn v. Trader Joe's Co. (2018) 20 Cal.App.5^th 989, 996, stating that a plaintiff whose demurrer has been sustained should be allowed to amend th complaint. The Court notes that this is the second attempt at pleading sufficient facts for claims based on fraud, with the Court indicating last time that the original complaint failed to provide specific allegations. Here, the Court will allow another attempt to provide more specific facts.

Demurrer as to the 1^st, 3^rd, 7^th, and 10^th causes of action is SUSTAINED, with 20 days leave to amend.

[1] The Court notes that on the title page of the FAC, Plaintiffs indicate that there are six causes of action. However, in the FAC, Plaintiffs allege 11 causes of action.