Judge: Walter P. Schwarm, Case: 30-2021-01182644, Date: 2022-10-18 Tentative Ruling
Cross-Defendants’ (Coastal Cocktails, Inc. dba Modern Gourmet Foods and Boaz Shonfeld) Demurrer to Second Amended Cross-Complaint (Demurrer), filed on 6-2-22 under ROA No. 303, is SUSTAINED.
“A demurrer tests the pleading alone, and not the evidence or the facts alleged. . . . To the extent there are factual issues in dispute, however, this court must assume the truth not only of all facts properly pled, but also of those facts that may be implied or inferred from those expressly alleged in the complaint. [Citations.]” (City of Atascadero v. Merrill Lynch, Pierce, Fenner & Smith, Inc. (1998) 68 Cal.App.4th 445, 459.) Code of Civil Procedure section 452, states, “In the construction of a pleading, for the purpose of determining its effect, its allegations must be liberally construed, with a view to substantial justice between the parties.” Perez v. Golden Empire Transportation Transit District (2012) 209 Cal.App.4th 1228, 1238, provides, “This rule of liberal construction means that the reviewing court draws inferences favorable to the plaintiff, not the defendant. [Citations.]” C.A. v. William S. Hart Union High School District (2012) 53 Cal.4th 861, 872 (C.A.), provides, “To survive a demurrer, the complaint need only allege facts sufficient to state a cause of action; each evidentiary fact that might eventually form part of the plaintiff’s proof need not be alleged. [Citation.]”
The Demurrer challenges the first (Fraud) and second (Breach of Contract) causes of action contained in the Second Amended Cross-Complaint (SACC), filed on 5-3-22 under ROA No. 264, as brought by Cross-Complainants (Nadeem Mumal, Madeline Huling, Hason Hoffman, and Tammy Underwood) pursuant to Code of Civil Procedure section 430.10, subdivision (e).
First Cause of Action (Fraud):
Lazar v. Superior Court (1996) 12 Cal.4th 631, 638 (Lazar), states, “ ‘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.’ [Citations.] [¶] ‘Promissory fraud’ is a subspecies of the action for fraud and deceit. A promise to do something necessarily implies the intention to perform; hence, where a promise is made without such intention, there is an implied misrepresentation of fact that may be actionable fraud. [Citations.]” Engalla v. Permanente Medical Group, Inc. (1997) 15 Cal.4th 951, 973-974 (Engalla), states, “ ‘ “Promissory fraud” is a subspecies of fraud and deceit. A promise to do something necessarily implies the intention to perform; hence, where a promise is made without such intention, there is an implied misrepresentation of fact that may be actionable fraud. [Citations.] [¶] An action for promissory fraud may lie where a defendant fraudulently induces the plaintiff to enter into a contract.’ [Citation.]” (See also, CACI No. 1902.)
Based on paragraphs 19 and 20 of the SACC, the SACC alleges fraud based on a promissory fraud theory. Paragraph 19 states in part, “At the time Coastal Cocktails entered into the Contingent Compensation Agreement and Shonfeld executed the agreement on behalf of Coastal Cocktails as its CEO, Coastal Cocktails and Shonfeld did not intend to perform the provisions of the Contingent Compensation Agreement, particularly those in paragraph 8. . . .” Paragraph 20 of the SACC states in part, “That Coastal Cocktails did not intend to honor their promises or perform the provisions of paragraph 8 of the Contingent Compensation Agreement is shown, in part, by the facts that . . . .”
The Demurrer states, “Despite this Court’s finding that the FAXC did not plead any factual allegations supporting any justifiable reliance on the Agreement by Mumal, Huling, Hoffman and Underwood, non-parties to the Agreement, the SAXC still does not contain any such factual allegations. In fact, the only additions in the SAXC are contained in a single paragraph (starting with the second paragraph of paragraph 22 of the SAXC, at 12:6 through 13:7) that do not set forth any allegations supporting justifiable reliance, let alone factual allegations.” (Demurrer; 8:20-25 (Emphasis in Demurrer.).) Cross-Complainants’ Opposition to Demurrer to First and Second Causes of Action of Second Amended Cross-Complaint (Opposition), filed on 10-4-22 under ROA No. 317, relies on paragraph 22 of the SACC to demonstrate that the SACC adequately pleads justifiable reliance. (Opposition; 7:1-8:24.)
Initially, the court notes that Sections 7.1, 7.2, and 7.3 of the Contingent Compensation Agreement (Agreement) describe the competitive activity that would allow Cross-Complainant—Mark Greenhall to receive compensation if Cross-Complainant—Mark Greenhall did not engage in that activity. (SACC, ¶ 15 and Exhibit 1.) Section 8 of the Agreement states, “Employer acknowledges that Greenhall is entitled to engage in the actions described in Sections 7.1 to 7.3 above if he so elects, but if he does that he will then not be entitled to receive the Contingent Consideration. Greenhall’s competition with Employer shall not entitle Employer to damages or to seek or obtain a restraining order, injunction or other remedy limiting Greenhall’s competitive activities. Greenhall acknowledges that he has not earned, and has not entitlement to receive, the Contingent Consideration, unless the conditions in Section 7 are met.” (SACC, ¶ 15 and Exhibit 1 (Underscore in Agreement.).)
Paragraph 22 of the SACC states in part, “. . . “Greenhall told Nadeem Mumal, Madeline Huling, Jason Hoffman and Tammy Underwood of the provisions of paragraph 8 of the Contingent Compensation Agreement, and they each relied thereon in deciding to terminate their at-will employment with Coastal Cocktails and to go to work for Ten Acre Gifts. . . .” The SACC does not allege that Cross-Defendants made any representations to any of the Cross-Complainants about any provision Agreement. Based on the SACC, the only representations made to Complainants about the provisions of paragraph 8 were by Cross-Complainant—Mark Greenhall. Any alleged reliance by Cross-Complainants were from representations by Cross-Complainant—Mark Greenhall rather than representations from Cross-Defendants.
Further, section 13 of the Agreement is a confidentiality provision and it states, “Greenhall shall not disclose this Agreement or any of the terms hereof to any third party except: (a) to his attorneys or tax advisors, who shall be instructed to keep such information confidential; (b) in connection with an audit or similar official governmental inquiry regarding the taxation of the payments hereunder; or (c) if required to be disclosed by law or by applicable judgment, order or decree of any court, or governmental body or agency having jurisdiction. In each of the foregoing cases, Greenhall shall, if legally permitted, notify Employer at least twenty (20) days prior to any contemplated disclosure, and in the case of clause (c) Greenhall shall cooperate with Employer, at the expense of Employer, in the event Employer elects to legally contest, avoid or restrict such disclosure.” (SACC, ¶ 15 and Exhibit 1.)
This confidentiality provision supports that Cross-Defendants did not intend for Cross-Complainant—Mark Greenhall to communicate the contents of the Agreement to Cross-Complainants.
Based on the above, the court SUSTAINS the Demurrer to the first cause of action because the SACC does not sufficiently plead that Cross-Defendants made the alleged representations directly to Cross-Complainants. Thus, the SACC does not adequately allege that Cross-Complainants justifiably relied on statements made by Cross-Defendants.
Second Cause of Action (Breach of Contract):
The Demurrer asserts, “The SAXC fails to adequately allege that Mumal, Hoffman, Huling, and Underwood have standing to bring either the First or Second Causes of Action, namely Fraud and/or Breach of the Written Contingent Compensation Agreement. Specifically, they have no standing to bring these causes of action because they are neither parties to nor third-party beneficiaries of the Agreement.” (Demurrer; 10:27-11:2.) Cross-Complainants rely on paragraph 22 of then SACC to show that the SACC sufficiently alleges that Cross-Complainants are third-party beneficiaries. (Opposition; 7:1-8:24.)
Levy v. Only Cremations for Pets, Inc. (2020) 57 Cal.App.5th 203, 211-212 (Levy), states, “Civil Code section 1559 states, ‘A contract, made expressly for the benefit of a third person, may be enforced by him at any time before the parties thereto rescind it.’ In Goonewardene v. ADP, LLC (2019) 6 Cal.5th 817, 243 Cal.Rptr.3d 299, 434 P.3d 124 (Goonewardene) our high court set forth three prerequisites to apply this doctrine: (1) the third party would in fact benefit from the contract; (2) a motivating purpose of the contracting parties was to provide a benefit to the third party; and (3) permitting a third party to bring its own breach of contract action against a contracting party is consistent with the objectives of the contract and the reasonable expectations of the contracting parties. [Citation.] As to the second element, ‘the contracting parties must have a motivating purpose to benefit the third party, and not simply knowledge that a benefit to the third party may follow from the contract.’ [Citation.] As to the third element, it ‘calls for a judgment regarding the potential effect that permitting third party enforcement would have on the parties' contracting goals, rather than a determination whether the parties actually anticipated third party enforcement at the time the contract was entered into.’ [Citation.]”
Here, the Agreement was between Cross-Complainant –Mark Greenhall and Defendant—Coastal Cocktails. (SACC, ¶ 15 and Exhibit 1.) Cross-Complainants were not parties to the Agreement. Thus, the parties to the Agreement does not expressly state it was for the benefit of a third party.
As to the second element regarding motivating purpose, the SACC alleges, “A motivating purpose of the Contingent Compensation Agreement was, in return for not having to pay the contingent compensation to Greenhall, to allow Greenhall to compete and hire Coastal Cocktails’ employees without fear of being sued, and for Coastal Cocktails’ employees to be allowed to be hired, join and participate in Greenhall’s competitive venture.” (SACC, ¶ 22.) The Agreement, however, SACC contradicts this allegation in the SACC. Specifically, the Agreement states, “The parties desire to enter into this agreement to provide Greenhall with an incentive not to compete with Employer or its successors during the time periods specified herein.” (SACC, ¶ 15 and Exhibit 1 (See the Recitals in the Agreement.).) The fact that the parties to the Agreement may have known that a benefit to a third party may follow does is not sufficient to alter the express purpose in the Agreement. Thus, Cross-Complainants have not sufficiently alleged the second element required to allege each of the Cross-Complainants were third-party beneficiaries under the Agreement.
The SACC also does not sufficiently allege the third element that permitting a third party to bring its own breach of contract action against a contracting party is consistent with the objectives of the contract and the reasonable expectations of the contracting parties. Cross-Complainants’ allegations that it is consistent with the objectives of the Agreement and the reasonable objectives of the parties to allow Coastal Cocktails’ former employees to sue for breach of the confidentiality provision of the Agreement. The confidentiality provision specifically prohibits Cross-Complainant—Mark Greenhall from disclosing the terms of the Agreement. The confidentiality provision is not consistent with allowing third-parties to bring claims under the Agreement because it shows that the parties to the Agreement did not intend its terms to be disclosed to third-parties.
Therefore, the court SUSTAINS the Demurrer to the second cause of action because the SACC does not sufficiently plead that Cross-Complainants were parties or third-party beneficiaries under the Agreement.
Based on the above, the court SUSTAINS Cross-Defendants’ (Coastal Cocktails, Inc. dba Modern Gourmet Foods and Boaz Shonfeld) Demurrer to Second Amended Cross-Complaint, filed on 6-2-22 under ROA No. 303, with 14-days leave to amend from the date of service of the notice of the court’s ruling. (City of Stockton v. Superior Court (2007) 42 Cal.4th 730, 747.)
Cross-Defendants are to give notice.