Demurrer, Motion to Strike, Motion for Leave to File a Third Amended Cross-Complaint (Judge Donna Fields Goldstein)


Case Number: GC046849??? Hearing Date: July 29, 2016??? Dept: NCB

13. GC046849
LILY WONG v PARK CENTER PARTNERSHIP et al
Demurrer
Motion to Strike
Motion for Leave to File a Third Amended Cross-Complaint

The Plaintiff, Jon W. Wong and Lily Y. Wong Family Trust, is the successor in interest to Lily Wong, who was a partner in the Park Center Partnership. The Defendants, California Forefront, LLC, and Larry Sue were also partners. The partnership?s purpose was the operation of commercial real property at 221 E. Walnut St., Pasadena, California.
The Complaint alleges that the Defendants have mismanaged the property and the Plaintiff seeks an accounting of the partnership funds, including the rents received from the partnership property and the funds invested in the stock market. Further, the Defendants have diverted or lost money that should have been distributed to the Plaintiff. In addition, the Defendants have breached a settlement agreement under which the Defendants were authorized to use an office on the property but required to pay rent. Finally, the Defendants made false representations to obtain the cash reserves of the partnership.

CAUSES OF ACTION IN SECOND AMENDED COMPLAINT:
1) Accounting
2) Conversion
3) Breach of Fiduciary Duty
4) Breach of Contract
5) Intentional Misrepresentation

This case arises from a controversy over the management of a partnership, Park Center Partnership, which owned a commercial building at 221 East Walnut St., Pasadena, CA. Trial is set for September 6, 2016.

This hearing concerns the following motions:

1) demurrer of the Defendant, Park Center directed at Second Amended Complaint;
2) demurrer and motion to strike of Defendants, California Forefront, LLC and Larry Sue directed at Second Amended Complaint; and
3) motion for leave to file a Third Amended Cross-Complaint of Cross-Complainant, California Forefront, LLC.

1. Demurrer of Defendant, Park Center to Second Cause of Action for Conversion

The Defendant argues that there are no allegations that plead that it interfered with any ownership interest of the Plaintiff. A claim for conversion must allege the following elements:

1) Plaintiff had the right of ownership and possession to the property converted;
2) Defendant unlawfully took the property, and
3) the value of the property converted.
Taylor v. S & M Lamp Co. (1961) 190 Cal. App. 2d 700, 705.

The Plaintiff alleges in paragraphs 43 and 45 that the Defendants diverted or lost money that should have been distributed to the Plaintiff. This demonstrates that the Plaintiff?s claim is based on the conversion of money. Under California law, money can be the subject of an action for conversion if a specific sum capable of identification is involved. Munger v. Moore (1970) 11 Cal. App. 3d 1, 7.
A review of the Plaintiff?s allegations reveal that they do not identify a specific sum of money capable of identification. Instead, the Plaintiff alleges that the Plaintiff?s share of partnership money has been diverted or ?lost? and that partnership money was invested in the stock market without the Plaintiff?s consent. These allegations are insufficient because they do not identify a specific sum.
Further, there are no allegations that plead that the partnership, Park Center, unlawfully took any money. Instead, the Plaintiff alleges in paragraphs 46, 47, 48, and 50 that Defendants, California Forefront and Larry Sue, exercised control over the money. This is insufficient to plead that Park Center unlawfully took the Plaintiff?s property.
Therefore, the Court sustains the demurrer to the second cause of action.

The Plaintiff did not oppose this demurrer, has not requested leave to amend, and has not identified any manner to amend this cause of action. Accordingly, the Court does not grant leave to amend.

2. Demurrer and Motion to Strike of Defendants, California Forefront, LLC and Larry Sue
a. Second Cause of Action for Conversion

The Defendants argue that the Plaintiff cannot seek relief under the tort claim of conversion for a breach of contract. The elements of a conversion cause of action are the following:

1) plaintiff’s ownership or right to possession of the property at the time of the conversion;
2) the defendant’s conversion by a wrongful act or disposition of property rights; and
3) damages.
Farmers Ins. Exchange v. Zerin (1997) 53 Cal. App. 4th 445, 451.

Under California law, money can be the subject of an action for conversion if a specific sum capable of identification is involved. Munger v. Moore (1970) 11 Cal. App. 3d 1, 7. However, conversion is the knowing and wrongful exercise of dominion over the personal property of another. Taylor v. Forte Hotels Int’l (1991) 235 Cal. App. 3d 1119, 1124. Because the act must be knowingly done, a breach of contract, even though it result in injury to, or loss of, specific property, does not constitutes a conversion. Id.
The Plaintiff argues that it may seek relief in tort because of the negligent manner in which the contract was performed. However, under California law, conduct amounting to a breach of contract becomes tortious only when it also violates a duty independent of the contract arising from principles of tort law. Erlich v. Menezes (1999) 21 Cal. 4th 543, 551. An omission to perform a contract obligation is never a tort, unless that omission is also an omission of a legal duty. Id.
A review of the Plaintiff?s second cause of action reveals that it is based on the failure to perform contractual obligations. The Plaintiff alleges in paragraph 43 that the Defendants had a duty under the Limited Partnership Agreement to distributed funds to partners based on their respective partnership interests. The Plaintiff alleges that the Defendants diverted or lost this money and withheld distributions in paragraphs 43, 46, and 48. Further, the Plaintiff alleges in paragraph 45 that the Defendants paid themselves a management fee in violation of the terms of the Limited Partnership Agreement and that the Defendants failed to pay rent for their on-site office in violation of the settlement agreement. These are contract claims because they are all based on the failure to perform duties under the Limited Partnership Agreement or the Settlement Agreement, e.g., to make distributions in accordance with partnership interests or to pay rent. The Plaintiff does not plead any facts showing that the Defendants violated a duty independent of the contracts that arises from principles of tort law. Since the acts are breaches of the contracts, they do not constitute a conversion claim.
Therefore, the Court sustains the demurrer to the second cause of action. It does not appear reasonably possible to correct this defect and plead a claim for conversion because the Plaintiff?s allegations show that the Defendants breached contractual duties, not tort duties.
Further, California law imposes the burden on the Plaintiff to demonstrate the manner in which it can amend its pleadings to state the conversion claim against the Defendants. Goodman v. Kennedy (1976) 18 Cal.3d 335, 349. The Plaintiff does not request leave to amend and does not identify the manner by which it can plead a claim for conversion. Accordingly, the Court does not grant leave to amend.

b. Third Cause of Action for Breach of Fiduciary Duty

The Defendants argue that this cause of action is also an attempt to re-state the breach of contract claim as a tort. To state a cause of action for breach of fiduciary duty, the Plaintiff must allege the following:

1) the existence of a fiduciary relationship;
2) its breach; and
3) damage proximately caused by that breach.
Roberts v. Lomanto (2003) 112 Cal. App. 4th 1553, 1562.

Confidential and fiduciary relations are, in law, synonymous, and may be said to exist whenever trust and confidence is reposed by one person in the integrity and fidelity of another. Twomey v. Mitchum, Jones, and Templeton, Inc. (1968) 262 Cal. App. 2d 690, 708. Traditional examples of fiduciary relationships in the commercial context include business partners and joint adventurers. Wolf v. Superior Court (2003) 107 Cal. App. 4th 25, 30. Inherent in each of these relationships is the duty of undivided loyalty the fiduciary owes to its beneficiary, imposing on the fiduciary obligations far more stringent than those required of ordinary contractors. Id.
The Plaintiff alleges in paragraph 53 that as a general partner, California Forefront owed a fiduciary duty to the Plaintiff. In paragraph 54, the Plaintiff alleges that the Defendant breached its fiduciary duties by engaging in the conduct set forth in paragraphs 11 to 24. A review of these paragraphs reveal the following breaches of fiduciary duty because they identify self-dealing, i.e., conduct by which California Forefront used position to obtain funds for itself:

1) In paragraph 12, the Plaintiff alleges that California Forefront made arrangements with tenants to make payments to California Forefront instead of the partnership. This demonstrates that the Defendant used its position as a managing partner of the property to obtain funds from the tenants that should have been paid to the partnership; and
2) In paragraph 13, the Plaintiff alleges that California Forefront is mismanaging the parking spaces by arranging for payments to be paid directly to California Forefront and not to the partnership. This demonstrates that the Defendant used its position as a managing partner of the property to obtain funds from persons using the parking spaces that should have been paid to the partnership.

These allegations are sufficient to plead that the Defendant, California Forefront, breached its fiduciary duties because the allegations show that it misused the trust reposed in it to operate the property for the benefit of the partnership by making deals with tenants and users of the parking spaces by which it was paid the rent or the usage fee and not the partnership.
Therefore, the Court overrules the demurrer.

c. Fifth Cause of Action for Intentional Misrepresentation
The Defendants argue that the fifth cause of action for fraud does not plead the elements of justifiable reliance or damages. Further, the Defendants repeat the argument that this is a breach of contract claim and not a tort.
The elements of the fraud cause of action are the following:

1) a representation, usually of fact, which is false;
2) knowledge of its falsity;
3) intent to defraud;
4) justifiable reliance upon the misrepresentation; and
5) damage resulting from that justifiable reliance
Stansfield v. Starkey (1990) 220 Cal. App. 3d 59, 72-73.

This cause of action is a tort of deceit and the facts constituting each element must be alleged with particularity; the claim cannot be saved by referring to the policy favoring liberal construction of pleadings. Committee on Children’s Television, Inc. v. General Foods Corp. (1983) 35 Cal.3d 197, 216.
The Plaintiff alleges in paragraph 68 that the Defendants represented to Lily Wong that the loan with Shanghai Commercial Bank, which was secured by partnership property, required the maintenance of certain cash reserves, which was $1,200,000. The Plaintiff then alleges the following;

1) paragraph 69: the representation was false;
2) paragraph 70: Mr. Sue and CFI knew the representation was false when made or it was otherwise made recklessly and without regard for its truth;
3) paragraph 71: the representation was made with the intent that Lily Wong rely on it;
4) paragraph 72: Lily Wong reasonably relied on the representation; and
5) paragraph 73: in reliance on the representation, Lily Wong did not secure a distribution of partnership funds.

In paragraph 76, the Plaintiff alleges that as a result of the Defendants? conduct, ?plaintiff has suffered and will continue to suffer damages in excess of the jurisdictional limit of this court plus lawful interest in accordance with proof at trial?. In paragraph 77, the Plaintiff alleges that she would have demanded a distribution that precluded the stock market losses.
These paragraphs do not allege the particular facts needed to plead the element of justifiable reliance. There are no allegations that plead that Lily Wong?s reliance was reasonable, e.g., that it was reasonable for Lily Wong to rely on the statement about a business loan for the partnership that prevented any distribution to her of her share of partnership funds.
The Defendants also argue that Lily Wong did not act reasonably in relying on this representation because she was a signatory to the loan agreement and she cannot claim she was unaware of its contents. However, the Plaintiff did not plead that Lily Wong was a signatory in the Second Amended Complaint.
Further, the allegations do not identify any damages that were the result of the alleged fraud. The Plaintiff alleges that she would have demanded a distribution; however, there are no facts identifying the approximate value of the distributions that she lost as a result of the alleged fraud.

Finally, the Plaintiff?s right to the distribution of partnership proceeds is based on a contract, i.e., the Limited Partnership Agreement. As noted above, conduct amounting to a breach of contract becomes tortious only when it also violates a duty independent of the contract arising from principles of tort law. Erlich v. Menezes (1999) 21 Cal. 4th 543, 551. An omission to perform a contract obligation is never a tort, unless that omission is also an omission of a legal duty. Id. Examples of cases permitting tort damages in contract cases are the following:

1) breaches of contractual duties that cause physical injuries;
2) breaches of the covenant of good faith and fair dealing in insurance contracts;
3) wrongful discharge in violation of public policy;
4) the fraudulent inducement of a contract.
Id. at 551-552.

Here, the Plaintiff?s damages are based on the Defendants? failure to pay her a distribution that was owed to her under the Limited Partnership Agreement. This is a breach of contract claim. There are no allegations that the Defendants breached any independent tort duty to the Plaintiff when they failed to perform their contractual duty to pay her a distribution, e.g., engaged in conduct that caused physical injuries or that fraudulent induced the Plaintiff to enter into a contract.

Therefore, the Court sustains the demurrer to the fifth cause of action because it fails to plead facts with particularity and it is a contract claim, not a tort claim.
California law imposes the burden on the Plaintiff to demonstrate the manner in which it can amend its pleadings to state the fraud claim against the Defendants. Goodman v. Kennedy (1976) 18 Cal.3d 335, 349. The Plaintiff does not request leave to amend and does not identify the manner by which it can plead a claim for conversion. Accordingly, the Court does not grant leave to amend.

d. Motion to Strike
The Defendants request that the Court strike the claims for punitive damages in paragraphs 54, 58, and 78 and in the prayer for relief. Since paragraphs 54 and 78 are in the second cause of action for conversion and the fifth cause of action for intentional misrepresentation, these paragraphs will be removed by the demurrers to these causes of action.
CCP section 436 authorizes the Court to strike any portion of a pleading that is improper or not drawn in conformity with California law. A motion to strike is the procedure to attack an improper remedy. Venice Town Council, Inc. v. City of Los Angeles (1996) 47 Cal.App.4th 1547, 1561-1562.
A complaint including a request for punitive damages must include allegations showing that the plaintiff is entitled to an award of punitive damages. Clauson v. Superior Court (1998) 67 Cal. App. 4th 1253, 1255. A claim for punitive damages cannot be pleaded generally and allegations that a defendant acted “with oppression, fraud and malice” toward plaintiff are insufficient legal conclusions to show that the plaintiff is entitled to an award of punitive damages. Brousseau v. Jarrett (1977) 73 Cal.App.3d 864, 872. Specific factual allegations are required to support a claim for punitive damages. Id.
Civil Code section 3294 authorizes a plaintiff to obtain an award of punitive damages when there is clear and convincing evidence that the defendant engaged in malice, oppression, or fraud. Section 3294(c) defines the terms in the following manner:

1) “Malice” means conduct which is intended by the defendant to cause injury to the plaintiff or despicable conduct which is carried on by the defendant with a willful and conscious disregard of the rights or safety of others.
2) “Oppression” means despicable conduct that subjects a person to cruel and unjust hardship in conscious disregard of that person’s rights.
3) “Fraud” means an intentional misrepresentation, deceit, or concealment of a material fact known to the defendant with the intention on the part of the defendant of thereby depriving a person of property or legal rights or otherwise causing injury.

In paragraph 58, the Plaintiff alleges that in light of the intentional and or reckless conduct of using partnership money for stock market speculation, the Plaintiff seeks an award of punitive damages. This demonstrates that the Plaintiff?s claim for punitive damages is based on the allegations in paragraph 20 that the Defendants used over $1,200,000 of partnership funds to speculate in the stock market and that this resulted in losses of $600,000. There are no allegations that the Defendants retained any of the money; instead, the allegations are that the Defendants mismanaged partnership funds by investing and losing funds in the stock market.
Further, there are no allegations in paragraph 58 that identify the basis under Civil Code section 3294 for seeking punitive damages, i.e., that the Defendants? conduct was malicious, oppressive, or fraudulent. There are no allegations that the Defendants intended to cause harm to the Plaintiff, i.e., engaged in malice, that the Defendants engaged in despicable conduct, i.e., engaged in malice or oppression, that the Defendants made false representations to deprive property or cause injury, i.e., fraud. There are no specific factual allegations that support the claim for punitive damages.
Therefore, the Court grants the motion to strike but allows 10 days for leave to amend the punitive damages claim.

3. Motion for Leave to Amend of Cross-Complainant, California Forefront, LLC
The Cross-Complainant seeks leave to file a Third Amended Cross-Complaint to correct the caption to correctly identify the parties, to correct paragraphs regarding John Wong, as the successor to Lily Wong, and to add a paragraph to the sole cause of action for declaratory relief. The extra paragraph will seek a judicial adjudication on the controversy arising from whether Lily Wong made an initial capital contribution. Further, the Cross-Complainant seeks to delete portions that seek relief regarding the effect of Lily Wong?s death because these issues have been resolved.
CCP section 473(a) permits the Court to grant leave to a party to amend a pleading. The Court?s discretion regarding granting leave to amend is usually exercised liberally to permit amendment of pleadings. Nestle v. Santa Monica (1972) 6 Cal.3d 920, 939. If a motion to amend is timely made and the granting of the motion will not prejudice the opposing party, it is error to refuse permission to amend. Morgan v. Superior Court of Los Angeles County (1959) 172 Cal. App. 2d 527, 530.
The Cross-Complainant?s attorney, Matthew Pero states that he discovered the need to add the claim regarding the capital contribution after recently consulting with a tax expert and learning that there was an issue with the amount of Lily Wong?s capital contribution for tax reporting purposes. This indicates that the motion is timely.
The trial date is September 6, 2016. No party has filed any opposition papers to offer evidence that granting leave will prejudice the Cross-Defendants? ability to prepare for trial.

Accordingly, the Court grants the motion because it is timely and there is no evidence that granting leave to file the Third Amended Cross-Complaint will cause prejudice to any party?s ability to prepare for trial. Third Amended Cross-Complaint to be filed within five court days.