Judge: William D. Claster, Case: 21-01217175, Date: 2022-10-14 Tentative Ruling

1. Defendants Electronic Commerce, Tyler Neuroth, and Darnell Ponder's Demurrer to Pure Health and Beauty Et Al's First Amended Complaint ROA 100

2. Defendants Electronic Commerce, Darnell Ponder and Tyler Neuroth's Notice of Motion and Motion to Strike Plaintiffs' First Amended Complaint  ROA 101

Updated 10/13/22 at 4:40 p.m.

Defendants Electronic Commerce, LLC (EC), Darnell Ponder and Tyler Neuroth seek (1) an order sustaining their demurrer to causes of action 1–5 of the First Amended Complaint (FAC), and (2) an order striking Plaintiffs’ allegations and request for punitive damages, and their request for attorney’s fees.

For the reasons below, the Court makes the following rulings:

1.    The Demurrer as to all causes of action is OVERRULED.

2.    The Motion to Strike as to Punitive Damages (FAC ¶ 122, Prayer ¶ 2) is DENIED.

3.    The Motion to Strike as to Attorney’s Fees (Prayer ¶ 7) is DENIED.

An answer must be filed on or before October 28, 2022.

A.      OVERVIEW

The FAC alleges that Defendants process credit card payments for e-commerce companies such as Plaintiffs. Plaintiffs assert Defendants have wrongfully withheld funds belonging to Plaintiffs based on illegitimate chargebacks and fees pursuant to a Merchant Processing Agreement (MPA). The amount wrongfully withheld is alleged to exceed $961,000.

The FAC asserts five claims: (1) Breach of Contract; (2) Breach of the Implied Covenant of Good Faith and Fair Dealing; (3) Conversion; (4) Money Had and Received; and (5) Violation of Penal Code § 496. The first and second causes of action are asserted against Defendants EC and Commercial Bank of California (CBC). The third, fourth and fifth causes of action are asserted against all Defendants, including Ponder and Neuroth as individuals.

B.       DEMURRER

In evaluating a demurrer, the Court is guided by long-settled rules. The Court “treat[s] the demurrer 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 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.” (C.A. v. William S. Hart Union High School Dist. (2012) 53 Cal.4th 861, 872.)

1.    Inclusion of Ponder and Neuroth as Parties

As a threshold issue, Defendants assert the FAC contains insufficient alter ego facts to include Ponder and Neuroth as parties and/or hold them liable for acts taken on behalf of Electronic Commerce. Additionally, Defendants argue that directors and officers are not personally liable on contracts signed by them for and on behalf of the corporation unless they purport to bind themselves individually. (citing United States Liab. Ins. Co. v. Haidinger-Hayes, Inc. (1970) 1 Cal.3d 586, 595.)

Plaintiffs argue that an alter ego theory is unnecessary because directors and officers can be held personally liable for tortious conduct if they participate in the wrong or authorize or direct that it be done. Here, Ponder and Neuroth are alleged to have participated and/or directed the actions complained of. (FAC ¶¶ 20-21, 123, 130, 135.) As currently pleaded, the Court finds these allegations sufficient.

The Court agrees that liability on an alter ego is not required in order to hold individual defendants liable for their tortious actions as direct participants. (People v. Pacific Landmark LLC (2005) 129 Cal.App.4th 1203, 1215; United States Liab. Ins. Co. v. Haidinger–Hayes, Inc. (1970) 1 Cal.3d 586, 595.) Further, merely alleging liability against Ponder and Neuroth based solely on their position as Electronic Commerce executives would be insufficient to state a claim against them individually. But Plaintiffs do more than that. Specifically, they allege that Neuroth and Ponder personally directed and participated in the alleged wrongdoing committed by EC. (FAC¶¶ 123, 130, 135) These allegations, particularly those regarding ”participation,” are sufficient for pleading purposes.  (See People v. Pacific Landmark LLC, supra pp. 1215-16) To the extent Defendants complain that there are insufficient details about exactly what Neuroth and Ponder actually did, they can be ferreted out in discovery.

2.    Breach of Contract

The elements of a cause of action for breach of contract are: (1) the existence of a contract; (2) the plaintiff’s performance or excuse for nonperformance; (3) the defendant’s breach; and (4) resulting damages to the plaintiff. (Coles v. Glaser (2016) 2 Cal.App.5th 384, 391.)

Defendants argue that Plaintiffs’ allegations lack specificity or are otherwise deficient in factual support. Specifically, Defendants assert (1) Plaintiffs do not differentiate between the “Processing Parties” for purposes of the breach involving post-termination reporting and failure to refund reserves; (2) the MPA does not require “…proper reporting…of each Plaintiff’s net sales post termination”; and (3) there is no explanation as to how, when or by whom funds were transferred between CBC and EC or how EC knew the funds belonged to Plaintiffs. The Court disagrees.

The FAC alleges that the MPA is a contract between each Plaintiff on the one hand, and Electronic Commerce and CBC on the other. (FAC ¶ 43, Ex. A.) A reporting requirement is stated in the MPA Terms and Conditions. (Id. Ex. A § 4B.) The breach is alleged as to both EC and CBC and Plaintiffs claim to have suffered damages as a result. This is sufficient from a pleading perspective. To the extent that additional details of the nature of the breach are needed, they can be explored in discovery.

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

“The implied covenant of good faith and fair dealing rests upon the existence of some specific contractual obligation.” (Racine & Laramie, Ltd. v. Department of Parks & Recreation (1992) 11 Cal.App.4th 1026, 1031). “The covenant of good faith is read into contracts in order to protect the express covenants and promises of the contract, not to protect some general public policy interest not directly tied to the contract’s purpose.” (Id.). “In essence, the covenant is implied 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.” (Id. at 1031-32). “If there exists a contractual relationship between the parties, as was the case here, the implied covenant is limited to assuring compliance with the express terms of the contract, and cannot be extended to create obligations not contemplated in the contract.” (Id. at 1032).

Defendants argue this cause of action is wholly duplicative of the breach of contract claim, fails to differentiate among Defendants, fails to identify the individuals or actions used to transfer of funds, and the conduct complained of is expressly permitted by the contract. (citing Carma Developers (CA), Inc. v. Marathon Dev. CA., Inc., (1991) 2 Cal.4th 342, 373.) The Court is not persuaded.

While related, this claim differs from the breach of contract claim in that the Processing Parties’ actions allegedly were undertaken in bad faith. Specifically, Plaintiffs allege Defendants breached the implied covenant by terminating the MPA without any prior notice, triggering its liquidated damages provision, and retaining the reserve funds. (FAC ¶¶ 54, 103, 110.) Plaintiffs further allege that by retaining of reserve funds after any reasonable risk of loss to the Processing Parties had expired, Defendants deprived Plaintiffs of the benefits of the contract. (FAC ¶ 110) Because this breach is asserted against both Processing Parties, there is no ambiguity in the pleading. (FAC ¶¶ 54, 58, Ex. A § 8D.)

4.    Conversion

The elements of a conversion claim are: (i) the plaintiff’s ownership or right to possession of the property; (ii) the defendant’s conversion by a wrongful act or disposition of property rights; and (iii) damages. (Lee v. Hanley (2015) 61 Cal.4th 1225, 1240.) “‘Money cannot be the subject of a cause of conversion unless there is a specific, identifiable sum involved, such as where an agent accepts a sum of money to be paid to another and fails to make the payment.’ [Citation omitted.]” (PCO, Inc. v. Christensen, Miller, Fink, Jacobs, Glaser, Weil & Shapiro, LLP (2007) 150 Cal.App.4th 384, 395.) Another court characterized the requirement as “a specific sum capable of identification.” (Voris v. Lampert (2019) 7 Cal.5th 1141, 1151 [citation omitted].)

Defendants argue lack of specificity as to how the transfer of funds from CBC to EC occurred, that the involvement of individual Defendants Ponder and Neuroth is not explained, that this claim is duplicative of the breach of contract claim, and, because the parties’ relationship was contractual and the losses were purely economic, the economic loss rule bars the claim. The Court disagrees.

Plaintiffs adequately allege all required elements. (FAC ¶¶ 116, 117, 118, 120-121.) For example, CBC transferred Plaintiff’s reserves to Electronic Commerce in violation of the “Card Brand Rule” and those funds were then used to capitalize a new business venture. The claim is not duplicative of the breach of contract claim, which is alleged only against the Processing Parties. Because the contract (MPA) does not cover the actions about which Plaintiffs complain, the economic loss rule does not apply. The FAC (¶ 120) also alleges that a specific amount--$961,000--was converted.

5.    Money Had and Received

The elements of a cause of action for money had and received are: (i) defendant received money that was intended to be used for the benefit of plaintiff; (ii) the money was not used for the benefit of plaintiff; and (iii) defendant has not given the money to plaintiff. (See Avidor v. Sutter’s Place, Inc. (2013) 212 Cal.App.4th 1439, 1454; see also CACI No. 370.)

Defendants again argue the FAC does not differentiate among Defendants who received and retained monies, explain how Defendants came to possess the monies, and, as the breach of contract claim fails, so too does this common count. (citing McBride v. Boughton (2004) 123 Cal.App.4th at 394.)

The Court finds the allegations are sufficient at this stage. (FAC ¶¶ 125-128.) The allegations set forth that CBC received Plaintiffs’ money, then transferred the money to Electronic Commerce. Defendants then used Plaintiffs’ money to fund new business ventures. (FAC ¶¶ 124, 130.)

6.    Violation of Penal Code § 496

Penal Code Section 496(a) provides that: “Every person who buys or receives any property that has been stolen or that has been obtained in any manner constituting theft or extortion, knowing the property to be so stolen or obtained, or who conceals, sells, withholds, or aids in concealing, selling, or withholding any property from the owner, knowing the property to be so stolen or obtained, shall be punished by imprisonment in a county jail for not more than one year, or imprisonment pursuant to subdivision (h) of Section 1170.” 

Subdivision (c), authorizes a civil action and treble damages for any person who has been injured by a violation of divisions (a) or (b). The California Supreme Court recently resolved a split in authority and held § 496(c) does not restrict the application of the statute and that treble damages and attorney's fees are thus available whenever property “has been obtained in any manner constituting theft.” (Siry Inv., L.P. v. Farkhondehpour, (2022) 13 Cal. 5th 333, 367 [fraudulent diversion of partnership funds].)

The elements of a civil claim under Penal Code § 496 are: (1) that the particular property was stolen; (2) that the accused received, concealed or withheld it from the owner thereof; and (3) that the accused knew that the property was stolen. (Finton Construction, Inc. v. Bidna & Keys, APLC (2015) 238 Cal.App.4th 200, 213.)

Defendants again argue the FAC does not differentiate among Defendants, that they cannot be liable for both receipt and theft of stolen property, and the COA lacks specificity as to who did what and how EC knew the funds were stolen. These assertions lack merit.

The essence of the allegations is a scheme by EC to enter into contracts with the intent to seize funds held in reserve. The allegations are that funds were unlawfully withheld by CBC then transferred to EC, so the same parties are not alleged to have both received and stolen the goods. Additionally, it is alleged that EC knew the funds were stolen because it carried out the scheme by refusing to provide reporting, violating the prohibition on possession of the funds, and enabling use of the funds to support other business ventures. This is sufficient to support a claim under the statute.

C.       MOTION TO STRIKE

A court may strike out any irrelevant, false, or improper matter inserted in any pleading or strike out all or any part of any pleading not drawn or filed in conformity with the laws of this state, a court rule or an order of the court.  (CCP § 436.)  Motions to strike are disfavored.  Pleadings are to be construed liberally with a view to substantial justice.  (CCP § 452.)  The allegations of the complaint are presumed true; they are read as a whole and in context.  (Clauson v. Superior Court (1998) 67 Cal. App. 4th 1253, 1255.)  The use of the motion must be “cautious and sparing” and is not intended to be used as a “procedural ‘line item veto’ for the civil defendant.” (PH II, Inc. v. Super. Ct. (1995) 33 Cal.App.4th 1680, 1682-83.)

1.    Punitive Damages

To plead a claim to recover punitive damages, a plaintiff must plead and show one of the following bases for imposition of exemplary damages, i.e. malice, oppression, or fraud.  (Civ. Code § 3294(a).) 

At the pleading stage, the complaint may rely on ultimate facts of fraud, oppression or malice. (Spinks v. Equity Residential Briarwood Apartments (2009) 171 Cal.App.4th 1004, 1055.)  Generally, a claim of fraud, such as false promises or inducing a person to enter into a contract through false statements, can lead a trier of fact to assess punitive damages in some cases. (See Bardis v. Oates (2004) 119 Cal.App.4th 1, 23, 9)

To plead a claim to recover punitive damages against an employer based on the acts of an employee, that plaintiff must plead facts showing the employer “had advance knowledge of the unfitness of the employee and employed him or her with a conscious disregard of the rights or safety of others or authorized or ratified the wrongful conduct for which the damages are awarded or was personally guilty of oppression, fraud or malice. With respect to a corporate employer, the advance knowledge and conscious disregard, authorization, ratification or [wrongful] act must be on the part of an officer, director, or managing agent of the corporation.” (Civ. Code, § 3294(b).)

Defendants argue the FAC fails to allege facts that any of the Defendants are guilty of oppression fraud or malice or describe any “despicable” conduct which is “…so vile, base, contemptible, miserable, wretched or loathsome” as required. (Civil Code § 3294(b).) On this basis, they seek to strike the prayer for punitive damages on the conversion claim.

The Court denies the motion. The FAC alleges a scheme (described in FAC ¶¶ 1-94, 113-23) by which all Defendants knowingly stole $961,000 of Plaintiffs’ processing funds and funneled the funds to a new venture, Tangram Payments. Plaintiffs allege that the scheme involved malice, oppression and fraud on the part of Defendants (FAC ¶ 122), and that Neuroth and Ponder, as corporate officers of EC (FAC ¶¶ 20-21), oversaw, directed and approved of the scheme. Considering the allegations as a whole, they satisfy the pleading requirements of Civil Code § 3294.

2.    Attorney’s Fees

Defendants argue there are no allegations supporting an award of attorney’s fees.

Plaintiffs argue attorney’s fees are provided by the MPA to Processing Parties, but that Civil Code § 1717 makes such provisions reciprocal in actions, as here, based on contract. (FAC § 63.)

The Court denies the motion. Defendants provide no authority that the basis for attorney’s fees must be pled. At any rate, the FAC expressly alleges the basis (FAC ¶ 63) and Defendants’ failure to address Plaintiffs’ argument in its Reply concedes the issue.