Judge: William D. Claster, Case: 17-00939294, Date: 2022-11-18 Tentative Ruling

Defendant Orange Coast Title’s Motion for Judgment on the Pleadings

Defendant Orange Coast Title Company of Southern California (“OCTC”) moves for judgment on the pleadings with respect to the second amended complaint (2AC) of plaintiff ARC Retail 1, LLC (“ARC”) in Case No. 18-01001587.  Specifically, OCTC contends judgment on the entire 2AC is appropriate because ARC is a forfeited entity that lacks standing to sue, and judgment on the second through fifth causes of action is appropriate because those claims are barred by the economic loss rule.  For the reasons set forth below, OCTC’s motion is DENIED.

The parties’ requests for judicial notice are GRANTED.

I.            Factual Background

The Court assumes the parties’ familiarity with the facts of this matter and the related cases involving a mortgage fraud scheme perpetrated by Vinh Phan and his associates.  As relevant here, Phan’s company JVS arranged to purchase the ground lease on a shopping center in Garden Grove.

As alleged in the 2AC, the purchase was to be financed by a loan from ARC’s predecessor in interest, Artemis, with that loan secured by a deed of trust on the ground lease.  Amerilink, a company secretly controlled by Phan, was the escrow agent.  Amerilink contracted with OCTC to serve as sub-escrow.  At closing, Amerilink and OCTC allowed escrow to close even though there were insufficient funds to complete the purchase.  OCTC recorded a grant deed that misrepresented the nature of the interest conveyed.  OCTC also allowed escrow to close with Artemis holding a second-position deed of trust on the ground lease, in violation of Artemis’s express escrow instruction that closing was contingent on Artemis having a first-position deed of trust.  OCTC concealed these facts from Artemis, which prevented Artemis (and later ARC) from working to unwind the transaction and get its money back.

Based on these allegations, ARC sued OCTC for breach of contract, negligence, breach of fiduciary duty, negligent misrepresentation, and fraud.  (A sixth cause of action was dismissed.)

II.          Standard of Review

“A motion for judgment on the pleadings is akin to a general demurrer; it tests the sufficiency of the complaint to state a cause of action.”  (Wise v. Pacific Gas & Electric Co. (2005) 132 Cal.App.4th 725, 738.)  Because motions for judgment on the pleadings are subject to the same standards as general demurrers, the Court is guided by long-settled rules.  The Court “treat[s] the [motion] as admitting all material facts properly pleaded, but not contentions, deductions or conclusions of fact or law.”  (Serrano v. Priest (1971) 5 Cal.3d 584, 591.)  “The complaint must be construed liberally by drawing reasonable inferences from the facts pleaded.”  (Rodas v. Spiegel (2001) 87 Cal.App.4th 513, 517.)  “Further, [the Court] gives the complaint a reasonable interpretation, reading it as a whole and its parts in their context.”  (Blank v. Kirwan (1985) 39 Cal.3d 311, 318.)  “To survive a [motion for judgment on the pleadings], 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.”  (C.A. v. William S. Hart Union High School Dist. (2012) 53 Cal.4th 861, 872.)

III.       Discussion

A.           Forfeited Company

At the time this motion was filed, ARC was not in good standing with the Franchise Tax Board and was listed by the Secretary of State as “Forfeited – FTB.”  (OCTC RJN, Exs. 1-3.)  As a result, OCTC argues ARC lacks standing to sue.

Before ARC filed its opposition, it revived its good standing status.  (ARC RJN, Exs. 1-2.)  As a result, it may sue and be sued.  The motion is denied insofar as it is based on ARC’s forfeited status.

B.           Economic Loss Rule

OCTC contends ARC’s tort claims are barred by the economic loss rule.  “In general, there is no recovery in tort for negligently inflicted ‘purely economic losses,’ meaning financial harm unaccompanied by physical or property damage. . . . [T]he rule functions to bar claims in negligence for pure economic losses in deference to a contract between litigating parties.”  (Sheen v. Wells Fargo Bank, N.A. (2022) 12 Cal.5th 905, 922.)  OCTC argues that ARC’s tort claims are based on purely economic losses caused by the same acts that constitute the alleged breach of contract.

In opposition, ARC points out that its contract with OCTC was one for performance of services.  It argues that under North American Chemical Co. v. Superior Court (1997) 59 Cal.App.4th 764, the economic loss rule does not apply in cases involving contracts for services.  (Id., at pp. 777, 785.)  In reply, OCTC says the Supreme Court’s more recent Aas decision “ruled that [North American Chemical] was ‘not persuasive.’”  (Reply at p. 3 [quoting Aas v. Superior Court (2000) 24 Cal.4th 627, 643].)  This is incorrect.  The quoted language from Aas refers to the plaintiffs’ argument, not North American Chemical.  (Aas, 24 Cal.4th at p. 643 [“The argument is not persuasive.”].)  

Neither Aas nor Sheen overruled or disapproved North American Chemical.  OCTC’s papers identify no case that does so, and the Court’s own research has found none.  As a result, North American Chemical is “binding upon” this Court, which “must accept the law declared by courts of superior jurisdiction.”  (Auto Equity Sales, Inc. v. Superior Court (1962) 57 Cal.2d 450, 455.)  Perhaps Aas and Sheen have so undercut the reasoning of North American Chemical that it should no longer be relied upon.  But that is a decision for the Court of Appeal or the Supreme Court, not this Court.  (Ibid. [“It is not their function to attempt to overrule decisions of a higher court.”].)

Under North American Chemical, the economic loss rule is inapplicable to services contracts like the one at issue here.  As a result, the motion is denied.