Case Name:??? Keech Properties, LLC, et al. v. Todd Hill, et al.????????? ?????
Case No.:??????? 2014-1-CV-268077
Demurrer and Motion to Strike Portions of the Fifth Amended Complaint by Defendants Sue Goodwin and Bells & Whistles, LLC????????????
Factual and Procedural Background
This is an action for fraud and breach of contract, among other things.? In 2011, plaintiff Keech Properties, LLC (?Keech?) and defendant Hill Development, LLC (?Hill Development?) created plaintiff Silicon Valley Homes, LLC (?SVH?) to acquire, renovate, and sell distressed residential properties in Santa Clara and nearby counties.? (Fifth Amended Complaint (?5AC?) at ? 17.)? Hill Development?of which defendant Todd Hill (?Hill?) is the managing and sole member?was the manager of SVH and Keech is a member.? (Id. at ? 18.)? Rick Pfaff, Inc. performed the remodeling of the distressed properties purchased by SVH.? (Id. at ? 24.)? Defendant Sue Goodwin (?Goodwin?) and her company, defendant Bells & Whistles, LLC (?B&W?), were the in-house bookkeeper for SVH and prepared all of SVH?s financial information.? (Id. at ? 22.)? Goodwin and B&W also performed bookkeeping and/or accounting for Hill Development and Rick Pfaff, Inc. and prepared all of Rick Pfaff, Inc.?s billings to SVH. (Id. at ?? 26, 28.)
Between late 2012 and June 2014, Hill allegedly caused SVH to expend $6,147,148 for labor and materials to Richard Pfaff, Inc. for work that was never performed or for work that was performed, but for which Rick Pfaff, Inc. failed to pay its subcontractors.? (5AC at ?? 15-16.)? During this time, Hill and Goodwin fraudulently transferred the $6,147,148 to Rick Pfaff, Inc. accounts.? (Id. at ? 16.)? Hill, Hill Development, Goodwin, and B&W allegedly concealed this fraud by controlling Richard Pfaff, Inc. and falsifying financial reports and online tracking systems.? (Id. at ? 15.) Specifically, they falsely reported profits of over $4,000,000 during this period and Hill and Hill Development collected over $1,500,000 in profit sharing while SVH lost money. (Ibid.)
At the same time, Hill secretly created another company, defendant Bay Area Real Estate Investments, LLC (?BAREI?) to purchase and remodel properties with funds falsely obtained from SVH.? (4AC at ? 15.)? Additionally, Hill is alleged to have caused liens to be filed against numerous SVH properties and to have expended significant amounts of company funds on personal expenditures. (Ibid.)
On March 4, 2016, Keech and SVH (collectively ?Plaintiffs?) filed the operative 5AC, setting forth the following causes of action: (1) intentional misrepresentation- fraud (against all defendants); (2) cancellation of agreement (against Hill and Hill Development); (3) breach of personal guaranty (against Hill); (4) quiet title to real property (deleted); (5) accounting (against Hill and Hill Development); (6) breach of contract (against Hill and Hill Development); (7) breach of fiduciary duty (against Hill, Hill Development, Ann Massoud, and Silicon Valley Home Real Estate Experts, Inc.); (8) unjust enrichment (against Hill, Hill Development, Goodwin, and B&W); (9) rescission of real property transaction (claim has been dismissed); and (10) professional negligence (against Goodwin and B&W).
The following motions are currently before the Court: (1) the demurrer by Goodwin and B&W (collectively, ?Defendants?) to the first cause of action in the 5AC on the ground that it fails to state a claim (Code Civ. Proc., ? 430.10, subd. (e)); and (2) Defendants? motion to strike portions of the 5AC.? (Code Civ. Proc., ?? 435-436.)
Demurrer to the 5AC??
Request for Judicial Notice
Defendants request judicial notice of the following documents: (1) the second amended complaint filed in this action on December 23, 2014 (Exhibit A); (2) the fourth amended complaint (?4AC?) filed on November 16, 2015 (Exhibit B); (3) Court?s tentative ruling on the demurrer and motion to strike portions of the 4AC (Exhibit C); and (4) the Court?s final order on the demurrer and motion to strike portions of the 4AC filed on February 23, 2016 (Exhibit D).
?Judicial notice is the recognition and acceptance by the court, for use by the trier of fact or by the court, of the existence of a matter of law or fact that is relevant to an issue in the action without requiring formal proof of the matter.?? (Poseidon Development, Inc. v. Woodland Lane Estates, LLC (2007) 152 Cal.App.4th 1106, 1117.)? The Court takes judicial notice of Exhibits A, B, and D as records of the superior court under Evidence Code section 452, subdivision (d).? However, with respect to Exhibit C, the attached tentative ruling does not constitute an endorsed-filed record of this court.? Moreover, the court?s statements in its tentative ruling are not binding, especially since the court has inherent power to reconsider any interim order.? (See Darling, Hall & Rae v. Kritt (1999) 75 Cal.App.4th 1148, 1156.)
Therefore, the request for judicial notice is GRANTED IN PART and DENIED IN PART.? The request is granted with respect to Exhibits A, B, and D.? The request is denied as to Exhibit C.
Legal Standard
?In reviewing the sufficiency of a complaint against a general demurer, we are guided by long settled rules.? ?We treat the demurrer as admitting all material facts properly pleaded, but not contentions, deductions or conclusions of fact or law.? We also consider matters which may be judicially noticed.??? (Blank v. Kirwan (1985) 39 Cal.3d 311, 318.)? ?A demurrer tests only the legal sufficiency of the pleading.? It admits the truth of all material factual allegations in the complaint; the question of plaintiff?s ability to prove these allegations, or the possible difficulty in making such proof does not concern the reviewing court.?? (Committee on Children?s Television, Inc. v. General Foods Corp. (1983) 35 Cal.3d 197, 213?214.)
?The reviewing court gives the complaint a reasonable interpretation, and treats the demurrer as admitting all material facts properly pleaded.? The court does not, however, assume the truth of contentions, deductions or conclusions of law.? ?? [I]t is error for a trial court to sustain a demurrer when the plaintiff has stated a cause of action under any possible legal theory.? And it is an abuse of discretion to sustain a demurrer without leave to amend if the plaintiff shows there is a reasonable possibility any defect identified by the defendant can be cured by amendment.?? (Gregory v. Albertson?s, Inc. (2002) 104 Cal.App.4th 845, 850.)
First Cause of Action: Intentional Misrepresentation???
With respect to the first cause of action [intentional misrepresentation], Defendants argue that the claim has not been pled with specificity.? In particular, Defendants assert that Plaintiffs fail to allege facts demonstrating reliance to state a fraud cause of action.? In opposition, Plaintiffs argue that sufficient facts have been pled to establish reliance on Defendants? misrepresentations.
?The elements of fraud are (1) the defendant made a false representation as to a past or existing material fact; (2) the defendant knew the representation was false at the time it was made; (3) in making the representation, the defendant intended to deceive the plaintiff; (4) the plaintiff justifiably relied on the representation; and (5) the plaintiff suffered resulting damages.?? (West v. JPMorgan Chase Bank, N.A. (2013) 214 Cal.App.4th 780, 792 [citation omitted].)
?Fraud must be pleaded with specificity rather than with general and conclusory allegations.? The specificity requirement means a plaintiff must allege facts showing how, when, where, to whom, and by what means the representations were made, and, in the case of a corporate defendant, the plaintiff must allege the names of the persons who made the representations, their authority to speak on behalf of the corporation, to whom they spoke, what they said or wrote, and when the representation was made.?? (West v. JPMorgan Chase Bank, N.A., supra, 214 Cal.App.4th at p. 793 [citation and quotation marks omitted].)
Courts enforce the specificity requirement in consideration of its two purposes.? (West v. JPMorgan Chase Bank, N.A., supra, 214 Cal.App.4th at p. 793.)? The first purpose is to give notice to the defendant with sufficiently definite charges that the defendant can meet them.? (Ibid.)? The second is to permit a court to weed out meritless fraud claims on the basis of the pleadings; thus, the pleading should be sufficient to enable the court to determine whether, on the facts pleaded, there is any foundation, prima facie at least, for the charge of fraud.? (Ibid.)
?Actual reliance occurs when the defendant?s misrepresentation is an immediate cause of the plaintiff?s conduct, altering his legal relations, and when, absent such representation, the plaintiff would not, in all reasonable probability, have entered into the transaction.?? (Cadlo v. Owens-Illinois, Inc. (2004) 125 Cal.App.4th 513, 519.)? ?The mere assertion of ?reliance? is insufficient.? The plaintiff must allege the specifics of his or her reliance on the misrepresentation to show a bona fide claim of actual reliance.?? (Ibid.)
The Court previously sustained the demurrer to the fraud cause of action on the ground that Plaintiffs failed to allege any specific acts or actions taken in reliance upon Defendants? misrepresentations.? (See Request for Judicial Notice [?RJN?] at Exhibit D.)? The Court also rejected Plaintiffs? alternative argument based on concealment as Plaintiffs failed to allege that Defendants had a duty to disclose facts to support such a claim.? (Ibid.)? In sustaining the demurrer, Plaintiffs were given leave to amend to allege facts supporting reliance.? Contrary to Defendants? arguments, Plaintiffs have amended their pleading to include specific facts establishing reliance to support the fraud cause of action.? (See 5AC at ?? 58-59.)? As a result of such reliance, Plaintiffs claim to have suffered significant financial losses in an amount approaching $6,147,148.? (Id. at ? 59.)? While Defendants may disagree with the allegations, such facts constitute reliance and must be accepted as true on demurrer.? (See Del E. Webb Corp. v. Structural Materials Co. (1981) 123 Cal.App.3d 593, 604 [?As a general rule in testing a pleading against a demurrer the facts alleged in the pleading are deemed to be true, however improbable they may be.?].)? Following civil discovery, Defendants may renew their challenge to the fraud claim on a motion for summary judgment with supporting evidence or at the time of trial.? Finally, Defendants raise the argument regarding the sham pleading doctrine but fail to explain how it applies with respect to the fraud claim.
Accordingly, the demurrer to the first cause of action on the ground that it fails to state a claim is OVERRULED.
Motion to Strike Portions of the 5AC
Defendants move to strike language from the 4AC with respect to: (1) alter ego; (2) agency; (3) conspiracy; (4) common enterprise; (5) aiding & abetting; (6) fraudulent transfers; (7) attorney?s fees; (8) punitive damages; (9) fraudulent plan; and (10) the eighth cause of action.
Legal Standard
A court may strike out any irrelevant, false, or improper matter asserted in a pleading.? (Code Civ. Proc., ? 436, subd. (a).)? A court may also strike out all or any part of a pleading not filed in conformity with the laws of the State of California.? (Code Civ. Proc., ? 436, subd. (b).)? The grounds for a motion to strike shall appear on the face of the challenged pleading or from any matter of which the court is required to take judicial notice.? (Code Civ. Proc., ? 437, subd. (a).)
Alter Ego Allegations
Defendants move to strike the alter ego allegations on page 3, lines 20-24 of the 4AC because they are not supported by an adequate factual basis.? ?To recover on an alter ego theory, a plaintiff need not use the words ?alter ego,? but must allege sufficient facts to show a unity of interest and ownership, and an unjust result if the corporation is treated as the sole actor.? [Citation.]? An allegation that a person owns all of the corporate stock and makes all of the management decisions is insufficient to cause the court to disregard the corporate entity.? [Citation.]?? (Leek v. Cooper (2011) 194 Cal.App.4th 399, 415.)
The Court previously granted the motion to strike the alter ego allegations with leave to amend as Plaintiffs did not allege facts to support an alter ego theory.? The 5AC now includes sufficient factual allegations to establish an alter ego theory for pleading purposes.? (See 5AC at ?? 14(g), (i).)
Accordingly, the motion to strike the alter ego allegations is DENIED.
Agency Allegations
Defendants move to strike the agency allegations in paragraph 14a on the ground that it is contradictory to other allegations in the 5AC.? Plaintiffs allege that Defendants and Hill were agents of one another and acting the course and scope of such agency.? (See 5AC at ? 14(a).)? Defendants argue that this agency allegation is inconsistent with the other allegation that Defendants were working at Hill?s direction.? (Id. at ? 22.)? However, the fact that Defendants took directions from Hill is not inconsistent with the fact that they were agents of each other.? Furthermore, any inconsistency would be resolved at the time of trial, not on a motion to strike allegations raised in the pleadings.? (See Mendoza v. Rast Produce Co., Inc. (2006) 140 Cal.App.4th 1395, 1402 [?When a pleader is in doubt about what actually occurred or what can be established by the evidence, the modern practice allows that party to plead in the alternative and make inconsistent allegations.?].)
Therefore, the motion to strike the agency allegations is DENIED.
Conspiracy Allegations
Defendants move to strike the conspiracy allegations in paragraphs 14(a), (c), (d), (e), (f), and page 15, lines 14 and 21 because Plaintiffs fail to allege that Defendants and Hill had a meeting of the minds to commit fraud.? The basis of a civil conspiracy is the formation of a group of two or more persons who have agreed to a common plan or design to commit a tortious act.? (Kidron v. Movie Acquisition Corp. (1995) 40 Cal.App.4th 1571, 1582; see Youst v. Longo (1987) 43 Cal.3d 64, 79 [?the conspirators must agree to do some act which is classified as a civil wrong?].)? While paragraph 14(b) vaguely mentions ?plans,? Plaintiffs fail to specifically allege that Defendants and Hill agreed to a common plan or had a meeting of the minds to support any conspiracy to commit fraud.
Therefore, the motion to strike the conspiracy allegations is GRANTED WITH 10 DAYS? LEAVE TO AMEND.
Common Enterprise Allegations
Defendants move to strike the common enterprise allegations in the 5AC on the ground that if the conspiracy fails, than common enterprise liability must also fail.? However, this argument fails as Defendants do not support this contention with citation to any legal authority.? (See Quantum Cooking Concepts, Inc. v. LV Associates, Inc. (2011) 197 Cal.App.4th 927, 934 [trial court not required to ?comb the record and the law for factual and legal support that a party has failed to identify or provide?]; see also Chavez v. Netflix, Inc. (2008) 162 Cal.App.4th 43, 52 [where appellant?s motion was supported by deficient memorandum, trial court was justified in denying the motion on procedural grounds].)
Accordingly, the motion to strike the common enterprise allegations is DENIED.
Aiding and Abetting Allegations
Defendants move to strike the aiding and abetting allegations on the ground that they are barred by the agent immunity rule.? Under this rule, ?an agent is not liable for conspiring with the principal when the agent is acting in an official capacity on behalf of the principal.?? (See Fiol v. Doellstedt (1996) 50 Cal.App.4th 1318, 1326.)? Defendants argue that agent immunity applies as they were working at all times as a bookkeeper under Hill?s direction.? (See 5AC at ?? 22 and 31.)? However, it cannot be determined from the face of the pleading if Defendants were acting on behalf of defendant Hill or for their own benefit.? (See Wise v. So. Pac. Co. (1963) 223 Cal.App.2d 50, 72-73 [disapproved on other grounds by Applied Equip. Corp. v. Litton Saudi Arabia, Ltd. (1994) 7 Cal.4th 503, 512, fn. 4] [agent immunity rule applies when agents are acting within scope of their agency and not for their own benefit].)? Thus, the agent immunity rule does not apply for pleading purposes.
Accordingly, the motion to strike the aiding and abetting allegations is DENIED.
Fraudulent Transfer Allegations
Defendants move to strike the fraudulent transfer allegations on page 6, lines 20-22 and page 16, lines 22-23 because such language refers to violations under the Uniform Fraudulent Transfer Act (?UFTA?) and no such claim exists in the 5AC.? Defendants are correct that Plaintiffs are not alleging a claim under the UFTA.? However, the subject allegations are relevant and provide support to the fraud claim which, as stated above, has survived demurrer.
Accordingly, the motion to strike the fraudulent transfer allegations is DENIED.
Attorney?s Fees
Defendants move to strike the prayer for attorney?s fees in the fifth cause of action as it is not support by contract or statute.? (See Hendrix v. Hendrix (1955) 130 Cal.App.2d 379, 383 [?Except where attorney?s fees are specifically allowed by statute, or by contract of the parties, they are not recoverable by a successful litigant as costs or otherwise.?]; Code Civ. Proc., ? 1021.)? In opposition, Plaintiffs argue that at least some of the defendants are subject to attorney?s fees because of an operating agreement between the parties.? However, Plaintiffs have not shown that B&W was a party to the operating agreement.? At a minimum, Plaintiffs should clarify whether they have a right to attorney?s fees against defendant B&W.
Therefore, the motion to strike attorney?s fees is GRANTED WITH 10 DAYS? LEAVE TO AMEND.
Punitive Damages Allegations
The motion to strike punitive damages in the first cause of action is DENIED as Plaintiffs have alleged a well pleaded fraud claim. ?(See Stevens v. Sup. Ct. (1986) 180 Cal.App.3d 605, 610 [a fraud cause seeking punitive damages need not include an allegation that the fraud was motivated by the malicious desire to inflict injury upon the victim; the pleading of fraud is sufficient].)
Fraudulent Plan Allegation
Defendants move to strike the fraudulent plan allegation in paragraph 31(a) which alleges that ?B&W adopted and ratified the actions of its manager Goodwin, putting her fraudulent plan into effect.?? Defendants argue that there are no facts to suggest that Goodwin had a plan.? This argument lacks merit as the entire 5AC alleges a scheme and plan to commit fraud by Defendants.
Accordingly, the motion to strike the fraudulent plan allegation is DENIED.
Eight Cause of Action
The motion to strike Defendants from the eighth cause of action [unjust enrichment] is GRANTED WITHOUT LEAVE TO AMEND.? The Court previously sustained Defendants? demurrer to the eighth cause of action without leave to amend.? (See RJN at Exhibit D.)? Thus, Plaintiffs cannot allege a cause of action against Defendants for Unjust Enrichment.