Judge: Walter P. Schwarm, Case: 30-2021-01212845, Date: 2022-11-01 Tentative Ruling

Defendants’ (Eventus Holdings, LLC, National Payment Systems, LLC, Sabin Burrell, and John Hynes) Demurrer to Plaintiff’s Complaint (Demurrer), filed on 6-28-22 under ROA No. 118, is OVERRULED.

The court DENIES Defendants’ Request for Judicial Notice, filed on 6-28-22 under ROA No. 113, as immaterial to the court’s decision. (Silverado Modjeska Recreation & Parks District v. County of Orange (2011) 197 Cal.App.4th 282, 307, fn. 18.)  

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, second, third, tenth, twelfth, fourteenth, fifteenth, sixteenth and seventeenth causes of action of Plaintiffs’ (Residual Income Opportunities, Inc. and Reuven Justin Cypers) Complaint, filed on 7-28-21 under ROA No. 2, pursuant to Code of Civil Procedure section 430.10, subdivision (e).

First (Declaratory Relief), Second (Restitution and Unjust Enrichment), Third (Professional Negligence), Tenth (Rescission Based on Mutual Mistake), and Seventeenth (Violation of California Business and Professions Code section 17200) Causes of Action:  

The Demurrer contends, “Counts I, II, III, X, and XVII of the Complaint depend upon Plaintiffs’ contention that one or more of the Defendants were required to be licensed real estate brokers in order to purchase an option from RIO that would entitle them to purchase and resell all or part of RIO’s merchant portfolio and related residuals.” (Demurrer; 3:20-23 (Italics and emphasis in Demurrer.).)  The Demurrer explains that the first, second, third, tenth, and seventeenth cause of action are deficient because “. . . Eventus has merely purchased an option to purchase RIO’s property in the future in order to sell it in combination with Eventus’s own property. (Exh. 1, p. 52.) The Complaint does not allege, nor could it, that Eventus or any other party has yet done anything in relation to such a sale. The Complaint does not allege that Eventus has offered RIO’s property for sale, solicited any buyers for it, negotiated any sale, or anything else that one must do on behalf of another to become a ‘broker’ under California law.” (Demurrer; 5:3-9 (Italics and emphasis in Demurrer.).)

Business and Professions Code section 10130 states in part, “It is unlawful for any person to engage in the business of, act in the capacity of, advertise as, or assume to act as a real estate broker or a real estate salesperson within this state without first obtaining a real estate license from the department . . . .”  Business and Professions Code section 10131 states in part, “A real estate broker within the meaning of this part is a person who, for a compensation or in expectation of a compensation, regardless of the form or time of payment, does or negotiates to do one or more of the following acts for another or others: [¶] (a) Sells or offers to sell, buys or offers to buy, solicits prospective sellers or buyers of, solicits or obtains listings of, or negotiates the purchase, sale, or exchange of real property or a business opportunity. . . .”  Salazar v. Interland, Inc. (2007) 152 Cal.App.4th 1031, 1038 (Salazar), states, “The transfer of a business opportunity as defined in section 10030 includes the transfer of those assets so essential that a business cannot continue without them and the transfer of future patronage or customers.”

Section 1.5 of the Option Agreement states, “(a) In the event that Purchaser exercises the Option and subsequently agrees to sell all or substantially all of its equity interests or assets, including, but not limited to, all or substantially all of its merchant processing portfolio to an unaffiliated third-party buyer in one transaction or a series of related transactions (‘Sale Transaction’): (a) Purchaser shall have an additional irrevocable option to purchase all or any portion of Seller’s wholly owned unencumbered Merchant account Portfolio and related Residuals not previously purchased by Purchaser and include such purchase residuals in the Sale Transaction (‘Second Option’); (b) Purchaser shall use commercially reasonable efforts to provide Seller, at the request and option of Seller’s, the right to participate in such Sale Transaction by selling directly to the buyer as part of the Sale Transaction all or any portion of its wholly owned unencumbered Merchant account Portfolio and related Residuals not previously purchased by Purchaser (‘Seller Tag Along Right’), and (b) provided that the Total Multiple (as hereinafter defined) in the Sale Transaction is sixty times (60x) or higher, Seller shall, at the request and option of Purchaser, participate in such Sale Transaction by selling directly to the buyer as part of the Sale Transaction all or any portion of its wholly owned unencumbered Merchant account Portfolio and related Residuals not already purchased by Purchaser (‘Purchaser Purchaser Drag Along Right’).” (Complaint, ¶ 54(a) and Exhibit A; Underscore in Option Agreement.)

Section 1.5 of the Option Agreement reflects that Defendant—Eventus Holdings, LLC has the authority to act as a real estate broker by facilitating a sale of a business opportunity to a prospective third-party buyer. Specifically, section 1.5 allows Defendant—Eventus Holdings, LLC to facilitate a sale of Plaintiff—Residual Income Opportunities, Inc.’s (RIO) Merchant account Portfolio.

Liberally construed, the Complaint adequately alleges that Defendant—Eventus Holdings, LLC) negotiated to solicit prospective purchasers of a business opportunity regarding RIO’s Merchant account Portfolio on behalf of RIO.  (For example, see Complaint, at ¶¶ 54, 56, 57, 58, 62, 63, and 68.)  The Complaint sufficiently pleads that Defendant—Eventus Holdings, LLC violated Business and Professions Code section 10130 by acting as a real estate broker without obtaining a real estate license.  Therefore, the court OVERRULES the Demurrer to the First, Second, Third, Tenth, and Seventeenth causes of action.

Fourteenth (Recovery of Treble Damages for Usurious Interest Rate), Fifteenth (Common Law Recovery or Offset of Usurious Interest & Fees), and Seventeenth (Violation of Business and Professions Code Section 17200):

The Demurrer states, “Because the interest rate contained within the Loan Agreement does not violate Delaware law and does not greatly exceed a permissible interest rate under California law, it is not usurious. As a result, Counts XIV, XV, and XVII of the Complaint fail.” (Demurrer; 8:21-23.)

Defendants rely on Mencor Enterprises, Inc., v. Hets Equities Corporation (1987) 190 Cal.App.3d 432, 436 (Mencor), which states, “Section 203 addresses usury and choice of law: ‘The validity of a contract will be sustained against the charge of usury if it provides for a rate of interest that is permissible in a state to which the contract has a substantial relationship and is not greatly in excess of the rate permitted by the general usury law of the state of the otherwise applicable law under the rule of § 188.’ [Citation.]”  In Mencor, the trial court sustained a demurrer to the first amended complaint without leave to amend. (Id., at p. 435.)  The Appellate Court reversed the trial court’s decision, and stated, “Our analysis of choice-of-law concepts leads to an inevitable conclusion. The specific incorporation of Colorado's 44 percent interest rate, which is usurious under California law, into the contract of the parties here does not as a matter of law validate the contract and immunize the parties to it from the rights and the penalties imposed by California law on parties to usurious transactions. As we have seen, the parties' choice of Colorado law will be permitted in a California forum only upon the examination of the reasonable relationship of the contract to Colorado, the substantial contacts of the parties with Colorado and consideration of California's fundamental policy with respect to usury. These are issues of fact requiring evidentiary hearings.” (Id., at pp. 440-441.)

The Complaint adequately pleads that the interest rate is usurious. (For example, see Complaint at ¶¶ 160, 161, 162, 170, 171, and 172.)  Whether the interest rate contained in the Loan Agreement violates Delaware law and greatly exceeds the permissible interest rate under California law is not a subject that the court can address by way of a demurrer.  Under Mencor, the court must conduct an evidentiary hearing to determine these issues.  Therefore, the court OVERRULES the Demurrer to the fourteenth, fifteenth, and seventeenth causes of action based on whether the interest rate is usurious.

Sixteenth Cause of Action (Violation of the California Financing Law):

The Demurrer asserts, “In sum, the Finance Lenders Law provides no rights whatsoever to aggrieved commercial actors like RIO and does not operate to void commercial loan agreements entered in violation of the statute. Count XVI of the Complaint should therefore be dismissed.” (Demurrer; 9:13-15.)

Finance Code section 22780 states in part, “Except as provided in Section 22696, any person who willfully violates any provision of this division, or who willfully violates any rule or order adopted pursuant to this division, shall, upon conviction, be punished by a fine of not more than ten thousand dollars ($10,000), by imprisonment in a county jail for not more than one year or pursuant to subdivision (h) of Section 1170 of the Penal Code, or by both that fine and imprisonment. However, no person may be imprisoned for the violation of any rule or order unless he or she had knowledge of the rule or order. Conviction under this section shall not preclude the commissioner from exercising the authority provided in Section 22713. . . .”

Loesch v. Bartholomew (1992) 5 Cal.App.4th Supp. 8, 13 (Loesch), states, “If the Legislature forbids the carrying on of business without the securing of a license and makes such action a criminal offense, any contract involved is void. [Citation.]”  (Velasquez v. Superior Court (2014) 227 Cal.App.4th 1471, 1477 at footnote 7 (Velasquez), states, “Appellate division decisions have persuasive value, but they are of debatable strength as precedents and are not binding on higher reviewing courts. [Citation.]”)

The Complaint sufficiently alleges the sixteenth cause of action in terms of stating a claim to void the agreement identified in paragraphs 177 of the Complaint under Loesch.  Therefore, the court OVERRULES the Demurrer to the sixteenth cause of action.

Based on the above, the court OVERRULES Defendants’ (Eventus Holdings, LLC, National Payment Systems, LLC, Sabin Burrell, and John Hynes) Demurrer to Plaintiff’s Complaint filed on 6-28-22 under ROA No. 118.  The court ORDERS Defendants to file an answer within 14 days of the date of service of the notice of the court’s decision.

Plaintiffs are to give notice.