Judge Upinder S. Kalra, Case Number: 22STCV31381, Date: 2023-10-24 Tentative Ruling

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1. Leave to file a cross-complaint against Tri-West, Ltd., Allen Gage, Larry Johnson, Dave White, and ROES 1 through 50, inclusive.

Plaintiff Tri-West filed the Complaint on September 26, 2022, against Defendants Kolay Flooring International, LLC (Kolay), MODM Kolay Manufacturing, LLC (Modm), and Daniel Mitchell (Mitchell) alleging (1) breach of contract, (2) fraud, (3) conversion, (4) unjust enrichment, (5) common counts, (6) theft under Penal Code section 496, and (7) UCL violations. Mitchell filed an Answer on November 22, 2022. Kolay and Moda filed an Answer on December 1, 2022. But, default had already been entered against Kolay and Moda. The court set aside default on February 16, 2023.

Tri-West is a flooring distributor and Kolay purports to be a flooring manufacturer. In May 2021, Kolay misrepresented to Tri-West that newly-opened manufacturing facility in Las Vegas, Nevada can begin promptly producing multiple high-quality flooring products meeting certain specifications and in significant volumes. Kolay agreed to produce 14 products and produce one million feet of product per month. It also agreed to produce and deliver product upon receipt of advance payment deposits.

In reliance on these statements, in August 2021, Tri-West and Kolay entered a Purchase and Supply Agreement (“Agreement”) for the purchase of products from Kolay. Tri-West agreed to advance pay 50% of all purchase orders and pay the rest upon delivery while Kolay agreed to use all reasonable efforts to meet requested delivery dates. If Kolay could not timely fulfill an order, Tri-West could cancel the purchase order and obtain a refund.

On August 12, 2021, Tri-West wired $557,160.80 as advances for 29 purchase orders. Kolay guaranteed to use this money to produce over 500,000 square feet of flooring at its Las Vegas factory, and over 8,000 trim pieces for that flooring. Kolay spent months promising that the flooring would ship. When a limited portion of the product did ship, it was defective and did not lock properly. Tri-West believes that Kolay is unable to produce the promised product. After months of waiting, Tri-West cancelled the order and requested the refund. Kolay representatives like Mitchell promised reimbursement in writing. Kolay has not refunded the money even after a written demand on August 19, 2022.

Tri-West seeks recovery of the $557,160.80 in advance payments, plus $500,000 in lost sales and profits, punitive damages, restitution, disgorgement, treble damages, and attorney’s fees and costs.

On July 10, 2023, Kolay and Modm (Moving Defendants) timely filed the instant motion. Plaintiff timely filed an opposition on October 11, 2023. Moving Defendants timely filed a reply on October 17, 2023.

A cross-complaint may be either permissive or compulsory. Compulsory cross-complaints are based on allegations arising out of the same transactions or occurrences as the causes of action which the plaintiff alleges in his or her complaint. (Code Civ. Proc., (CCP) § 426.10, subd. (c).)¿Compulsory cross-complaint causes of action must exist at the time an answer to the original cross-complaint is required.¿(CCP § 426.30, subd. (a).)¿ All other cross-complaints are permissive.¿(CCP § 428.10.) If a party fails to file any cross-complaint before or when they file an answer, they must move the court for leave to file a cross-complaint.¿ (CCP § 428.50.) The court “shall” grant leave to file a compulsory cross-complaint, as long as the party demonstrates that, notwithstanding being late, the motion for leave is brought in good faith.¿ (CCP § 426.50.)¿The court “may” grant leave to file a permissive cross-complaint “in the interest of justice at any time during the course of the action.”¿ (CCP § 428.50, subd. (c).)¿¿

A policy of liberal construction of section 426.50 to avoid forfeiture of causes of action is imposed on the trial court.¿ (Silver Orgs. v. Frank (1990) 217 Cal. App. 3d 94, 98-99.) ¿A motion to file a cross-complaint at any time during the course of the action must be granted unless substantial evidence of bad faith is demonstrated. ¿(Ibid.)

Moving Defendants contend their proposed cross-complaint is compulsory because it arises out of the same transaction or occurrence as those stated in the Complaint. Plaintiff argues that those causes of action against the proposed individual cross-defendants are permissive because they are non-parties.

Here, the proposed cross-complaint is compulsory because it asserts claims between the Moving Defendants and the Plaintiff that arise out of the same transaction and occurrence as alleged in the underlying Complaint. The court is unaware of authority that provides for a mixed cross-complaint. Additionally, Plaintiff has cited no authority supporting its position that a compulsory cross-complaint becomes a permissive cross-complaint if there are parties in addition to the plaintiff named as cross-defendants. Specifically, Plaintiff’s reliance on Banerian v. O’Malley (1974) 42 Cal.App.3d 604 and American Bankers Ins. Co. v. Avco-Lycoming Division (1979) 97 Cal.App.3d 732 are unpersuasive because they do not concern a “mixed” cross-complaint and, indeed, discuss that a compulsory cross-complaint is between a plaintiff and a defendant.

Moving Defendants contend that they requested leave to file its cross-complaint after conducting extensive witness interviews and document review to determine they had a viable affirmative cross-complaint claim against Plaintiff. Plaintiff argues that Kolay and Modm are not legitimately advancing this cross-complaint to vindicate their rights, but as part of a defensive litigation strategy.[1] Moving Defendants reply that Plaintiff did not offer substantive evidence of bad faith.

Here, Plaintiff has not shown Moving Defendants acted in bad faith. First, Plaintiff has not shown that Moving Defendants’ request to set PMQ depositions in November 2023 constitute bad faith. Indeed, Defendant notes that the PMQ deposition schedule proposal in November 2023 related to witness unavailability and counsel unavailability due to jury trial. [Reply at pp. 3:26-4:1; see also Hori Decl. ¶ 9.] Second, Plaintiff implies that Moving Defendants’ motivation in filing the cross-complaint is as leverage to dismiss the individual cross-defendants in exchange for dismissal of Defendant Mitchell. [Hori Decl. ¶10.]

Accordingly, Moving Defendants did not seek leave to file a cross-complaint in bad faith.

Moving Defendants contend that Plaintiff will not suffer undue prejudice by allowing it to file a cross-complaint because trial may be only delayed. Plaintiff argues that it will be prejudiced by an anticipated continuance of the currently-set April 29, 2024 trial date and necessity to conduct additional discovery.

Here, Plaintiff has not demonstrated it will be unduly prejudiced by Moving Defendants’ cross-complaint.[2]

Accordingly, there is no undue prejudice in allowing Moving Defendants to file a cross-complaint.

[1] Plaintiff argues bad faith by Kolay & Modm for failing to raise cross-complaint issues until well-after they were forced to oppose Plaintiff’s attachment application – but this could just as easily be poor time management by the lawyers.

[2]Delay of trial in and of itself, without the risk of losing critical evidence or adding costs of trial preparation, does not constitute prejudice. (See Morgan v. Superior Court (1959) 1972 Cal.App.2d 527, 530-31; Magpali v. Farmers Ins. Grp., Inc. (1996) 48 Cal.App.4th 471, 486-87.) Plaintiff’s reliance on Crocker Nat. Bank v. Emerald (1990) 221 Cal.App.3d 852 is misplaced because the party filed a cross-complaint five times and each time the responding party successfully demurred. Additionally, the proposed causes of action in the cross-complaint there accrued two years after the party made his appearance. (Id. at 864.) Here, Moving Defendants show that their causes of action arose at the time of their answer and Plaintiff only challenged supposed delay in moving for leave to file the cross-complaint.