Judge William A. Crowfoot, Case Number: 23AHCV01884, Date: 2024-02-07 Tentative Ruling

Judge: William A. Crowfoot, Case: 23AHCV01884, Date: 2024-02-07 Tentative Ruling

On August 18, 2023, plaintiffs CHR Development Inc. (“CHR”) and Dream Auto, Inc. (“Dream Auto”) (collectively, “Plaintiffs”) filed this action against defendants Option Motor Cars, Inc. (“Option Motor Cars”) and Michael Xuye Li (“Li”) (collectively, “Defendants”). Plaintiffs assert six causes of action for: (1) breach of contract, (2) breach of the implied covenant of good faith and fair dealing, (3) conversion, (4) tort of another claim for attorney’s fees, (5) violation of Penal Code section 496, and (6) unfair competition.

This action arises from several contracts. The first contract was verbal or implied by conduct, and formed on or around August 17, 2017 (“the 2017 Dream Auto Contract”). The 2017 Contract provided that Dream Auto would loan $700,000 to Option Motor Cars with the interest rate of 8%.

In 2019, Dream Auto and Option Motor Cars entered into another contract, either verbal or implied by conduct, for Dream Auto to loan about $2,700,000 to Option Motor Cars with an annual interest rate of 10% (the “2019 Dream Auto Contract”). Upon execution of the 2019 Dream Auto Contract, Dream Auto transferred about $2,700,000 to Option Motor Cars at various times throughout 2019.

On or about June 30, 2018, CHR and Option Motor Cars entered into a written contract for CHR to loan about $1,000,000 to Option Motor Cars (the “2018 CHR Contract”). Under the 2018 CHR Contract, Option Motor Cars would also pay CHR annual interest of about $100,000, wages of $100,000 to an employee of CHR who would work for Option Motor Cars, and 40% of any and all profits obtained by Option Motor Cars from the use of CHR’s loans. Upon execution of the 2018 CHR Contract, CHR transferred about $1,000,000 to Option Motor Cars.

A little more than a year later, on or about July 1, 2019, the 2018 CHR Contract was renegotiated and amended (the “2019 CHR Contract”). A true and correct copy of the 2019 CHR Contract in Chinese along with a certified English translation is attached to the Complaint as Exhibit 1, and provided that Option Motor Cars would continue to repay the loan of about $1,000,000 as well as continuing to owe an annual interest of about $100,000, wages of about $100,000 to an employee of CHR who would work for Option Motor Cars, and 40% of any and all profits obtained by Option Motor Cars from the use of CHR’s loaned money.

On or about April 19, 2022, CHR and Option Motor Cars entered into another written contract (the “2022 CHR Contract”). The 2022 CHR Contract stated that there was $640,000 owed on the 2019 CHR Contract. The 2022 CHR Contract also assigned $240,000 from a separate loan to Option Motor Car from nonparty Jaanyin, as well as $120,000 from the 2017 Dream Auto Contract.

Option Motor Cars made several payments between August 2022 and June 2023, but Plaintiffs allege that Option Motor Cars still owes CHR: (1) approximately $910,00 for the principal amount of the loan and $46,480 in interest, and (2) $55,329 in wages to CHR’s employee. Plaintiffs further claim that Option Motor Cars never paid a percentage of Option Motor Car’s profits as agreed upon in the 2018 CHR Contract and 2019 CHR Contract.

Plaintiffs also allege that Option Motor Cars owes Dream Auto at least $230,000 of the principal and $12,606 in interest on the 2017 Dream Auto Contract and $361,477.29 in interest on the 2019 Dream Auto Contract.

A demurrer tests the legal sufficiency of the pleadings and will be sustained only where the pleading is defective on its face. (City of Atascadero v. Merrill Lynch, Pierce, Fenner & Smith, Inc. (1998) 68 Cal.App.4th 445, 459.) “We treat the demurrer as admitting all material facts properly pleaded but not contentions, deductions or conclusions of fact or law. We accept the factual allegations of the complaint as true and also consider matters which may be judicially noticed. [Citation.]” (Mitchell v. California Department of Public Health (2016) 1 Cal.App.5th 1000, 1007; Del E. Webb Corp. v. Structural Materials Co. (1981) 123 Cal.App.3d 593, 604 [“the facts alleged in the pleading are deemed to be true, however improbable they may be”].) Allegations are to be liberally construed. (Code Civ. Proc., § 452.) A demurrer may be brought if insufficient facts are stated to support the cause of action asserted. (Code Civ. Proc., § 430.10, subd. (e).)

Any party, within the time allowed to respond to a pleading may serve and file a notice of motion to strike the whole or any part thereof. (Code Civ. Proc., § 435, subd. (b)(1).) The court may, upon a motion, or at any time in its discretion, and upon terms it deems proper, strike any irrelevant, false, or improper matter inserted in any pleading. (Code Civ. Proc., § 436, subd. (a); Stafford v. Shultz (1954) 42 Cal.2d 767, 782 [“Matter in a pleading which is not essential to the claim is surplusage; probative facts are surplusage and may be stricken out or disregarded”].) The court may also strike all or any part of any pleading not drawn or filed in conformity with California law, a court rule, or an order of the court. (Code Civ. Proc., § 436, subd. (b).) An immaterial or irrelevant allegation is one that is not essential to the statement of a claim or defense; is neither pertinent to nor supported by an otherwise sufficient claim or defense; or a demand for judgment requesting relief not supported by the allegations of the complaint. (Code Civ. Proc., § 431.10, subd. (b).) The grounds for moving to strike must appear on the face of the pleading or by way of judicial notice. (Code Civ. Proc., § 437.)

Leave to amend must be allowed where there is a reasonable possibility of successful amendment. (Goodman v. Kennedy (1976) 18 Cal.3d 335, 348.) The burden is on the complainant to show the Court that a pleading can be amended successfully. (Ibid.)

Before filing a demurrer or motion to strike, the demurring or moving party shall meet and confer with the party who has filed the pleading and shall file a declaration detailing their meet and confer efforts. (Code Civ. Proc., §§ 430.41, subd. (a); 435.5, subd. (a).)

Defendants erroneously argue that Dream Auto’s claims must be dismissed pursuant to Corporations Code section 17708.07 because Dream Auto is incorporated in Samoa. (Demurrer, pp. 4-5.) In response, Dream Auto argues that it is qualified to maintain this action because it has filed a Statement and Designation of an Out-of-State Stock Corporation with the Secretary of State of California as required by Corporations Code section 17708.07(a). (Plaintiff’s RJN, Ex. A.) Defendants do not contest this issue in their reply brief and the Court overrules Defendants’ demurrer to Dream Auto’s claims on this basis.

Defendants argue that Plaintiffs’ cause of action for breach of contract is uncertain and contend that Plaintiffs must assert a separate cause of action for each contract alleged. The Court is not persuaded, as “demurrers for uncertainty are disfavored, and are granted only if the pleading is so incomprehensible that a defendant cannot reasonably respond.” (Mahan v. Charles W. Chan Ins. Agency, Inc. (2017) 14 Cal.App.5th 841, 848, fn. 3.) “A demurrer for uncertainty is strictly construed, even where a complaint is in some respects uncertain, because ambiguities can be clarified under modern discovery procedures.” (Chen v. Berenjian (2019) 33 Cal.App.5th 811, 822, [quoting Khoury v. Maly's of California, Inc. (1993) 14 Cal.App.4th 612, 616].)

Here, Plaintiffs’ allegations regarding the various contracts are not ambiguous and Plaintiffs have even attached two of the contracts as exhibits to the Complaint. Furthermore, Defendant cites to no authority for the proposition that Plaintiffs must allege a separate cause of action for each contract they allege was breached. The demurrer to the First Cause of Action is overruled.

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

The covenant of good faith and fair dealing is implied by law in every contract, and it acts “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.” (Racine & Laramie, Ltd. v. Department of Parks & Recreation (1992) 11 Cal.App.4th 1026, 1031-1032.)

Defendants argue that Plaintiff’s claim for breach of the implied covenant of good faith and faith dealing is “superfluous” and must be dismissed. In opposition, Plaintiffs point to paragraph 67 in which they allege that Defendants refused to provide financial statements and engaged in “affirmative conduct and conduct independence of [Option Motor Cars]’s contractual breaches.” But, Plaintiffs do not explain how failing to provide financial statements prevents them from receiving the benefit of the underlying contracts.

Next, Defendants argue that Plaintiffs’ causes of action for conversion and violation of Penal Code section 496 fail. First, Defendants argue that there are no allegations that Li converted any property or received stolen funds. This assertion ignores Plaintiffs’ allegations that as recently as sometime in July 2023, Plaintiffs demanded that Option Motor Cars and Li return the loaned money and that upon this demand, Plaintiffs were the rightful owners of the money. (Comp., ¶¶ 75-76.) Option Motor Cars and Li allegedly interfered with Plaintiffs’ right to the loaned money by retaining possession of it and refusing to return it without Plaintiffs’ consent. (Compl., ¶¶ 77-78.) These allegations are sufficient to state a claim for conversion. Defendants’ demurrer to Plaintiffs’ Third Cause of Action is OVERRULED.

Next, Defendants argue that Plaintiffs willingly loaned Option Motor Cars the money; therefore, Defendants did not receive stolen property and cannot be liable under Penal Code section 496. This ignores the allegation that Defendants obtained the money through “false representations and pretenses” including “promises to pay.” (FAC, ¶ 95.) Furthermore, a violation of Penal Code section 496 has allegedly occurred because Defendants have allegedly withheld the money when Plaintiffs have demanded it back. (Bell v. Feibush (2013) 212 Cal.App.4th 1041, 1049-1050.)

For Plaintiffs’ Fourth Cause of Action, Plaintiffs assert that they are entitled to attorney’s fees based on the “tort of another” doctrine. “The tort of another doctrine applies to economic damages (i.e., attorney fees incurred in litigation with third parties) suffered as a result of an alleged tort.” (Mega RV Corp. v. HWH Corp. (2014) 225 Cal.App.4th 1318, 1339, as modified on denial of reh'g (May 20, 2014).)

Plaintiffs allege that Defendants’ actions have caused Plaintiff to file this lawsuit “against other defendants” and argue that they are entitled to attorneys’ fees as a result. (Compl., ¶ 87.) Plaintiffs claim that Li has committed torts which have caused Plaintiffs to sue Option Motor Cars and, in turn, Option Motor Cars, has committed torts which have caused Plaintiff to sue Li. However, Plaintiffs’ Complaint does not allege any specific action taken by Li which would constitute a tort and the argument that Li and Option Motor Cars each committed independent torts is unpersuasive considering Plaintiffs’ alter ego allegations in paragraphs 5 and 7. Instead, it appears that Plaintiffs are merely attempting to recover attorneys’ fees incurred in this litigation for Defendants’ alleged torts instead of there being a true third party. (Schneider v. Friedman, Collard, Poswall & Virga (1991) 232 Cal.App.3d 1276, 1282, reh'g denied and opinion modified (Aug. 29, 1991) [rationale for limiting the exception to third party litigation is to “prevent a plaintiff from circumventing the American Rule by routinely filing a second action seeking the attorney's fees expended in the first”].)

The UCL “permits violations of other laws to be treated as unfair competition that is independently actionable.” (Kasky v. Nike, Inc. (2002) 27 Cal.4th 939, 949, as modified (May 22, 2002).)

Plaintiffs’ claim for unfair competition is based on their claim for breach of contract as well as Civil Code section 3336 which provides for damages for wrongful conversion and Penal Code section 496.

Penal Code section 496 allows for the recovery of attorneys’ fees. As the Court overrules Defendants’ demurrer to Plaintiffs’ Fifth Cause of Action for Violation of Penal Code section 496 is overruled, the motion to strike is DENIED.

Defendants argue that Plaintiffs’ request for punitive damages is not sufficiently supported by specific factual allegations. The Court agrees. “‘Punitive damages are proper only when the tortious conduct rises to levels of extreme indifference to the plaintiff’s rights, a level which decent citizens should not have to tolerate.’ [Citation.]” (Lackner v. North (2006) 135 Cal.App.4th 1188, 1210.) “As amended to include [despicable], the [Civil Code section 3294] plainly indicates that absent an intent to injure the plaintiff, ‘malice’ requires more than a ‘willful and conscious’ disregard of the plaintiffs’ interests. The additional component of ‘despicable conduct’ must be found.” (College Hospital Inc. v. Superior Court (1994) 8 Cal.4th 704, 725.) The statute’s reference to despicable conduct represents a “new substantive limitation on punitive damage awards.” (Id.) Despicable conduct is “conduct which is so vile, base, contemptible, miserable, wretched or loathsome that it would be looked down upon and despised by ordinary decent people. Such conduct has been described as ‘having the character of outrage frequently associated with crime.’” (Tomaselli v. Transamerica Ins. Co. (1994) 25 Cal.App.4th 1269, 1287.)

Plaintiffs’ claims are essentially premised on Defendants’ failure to pay back a loan. Even if Plaintiffs’ claims are pleaded as torts in the alternative, there are no allegations of “oppression, fraud, or malice” sufficient to state a claim for punitive damages.

The motion to strike is GRANTED with respect to Plaintiffs’ prayer for punitive damages.

The demurrer is SUSTAINED as to Second and Fourth Causes of Action with 15 days’ leave to amend and OVERRULED as to the First, Third, Fifth, and Sixth Causes of Action.

The motion to strike is GRANTED with respect to Plaintiffs’ prayer for punitive damages and DENIED as to Plaintiffs’ request for attorneys’ fees.

William A. Crowfoot

Judge of the Superior Court

Parties who intend to submit on this tentative must send an email to the Court at ALHDEPT3@lacourt.org indicating intention to submit on the tentative as directed by the instructions provided on the court website at www.lacourt.org. Please be advised that if you submit on the tentative and elect not to appear at the hearing, the opposing party may nevertheless appear at the hearing and argue the matter. Unless you receive a submission from all other parties in the matter, you should assume that others might appear at the hearing to argue. If the Court does not receive emails from the parties indicating submission on this tentative ruling and there are no appearances at the hearing, the Court may, at its discretion, adopt the tentative as the final order or place the motion off calendar.