Case Name: Meridian Financial Services, Inc., et al. v. Phan, et al.  

Case No.: 1-13-CV-254980

Defendant Chicago Title Company (“Chicago Title”) demurs to the complaint (“Complaint”) filed by plaintiffs Meridian Financial Services, Inc. and Mark Yazdani (collectively, “Plaintiffs”) and moves to strike portions contained therein.

On October 22, 2013, Plaintiffs filed a complaint against Chicago Title, Lananh Phan (“Phan”) and Diane Do (“Do”) asserting claims for (1) breach of contract, (2) fraud, (3) fraud in the inducement, (4) negligent misrepresentation, (5) violation of unfair business practices act, (6) escrow negligence, (7) negligent supervision and (8) breach of fiduciary duty.  According to the allegations of the Complaint, from April 12, 2012 to June 26, 2013, Plaintiffs invested over $5 million with Phan in a gold investment scheme that she touted.  (Complaint, ¶ 16.)  Phan purportedly guaranteed Plaintiffs a monthly return of 5%-6% plus full return of their principal.  (Id.)  As they reinvested their guaranteed monthly returns, the total amount of money invested with Phan was over $9 million as of October 22, 2013.  (Id., ¶ 18.)

Plaintiffs’ investments operated without incident throughout 2012, during which time Phan verbally confirmed that their monthly returns were “reinvested” into the venture.  (Complaint, ¶ 23.)  However, in 2013, Phan informed Plaintiffs that she could not return their money to them because it was located in offshore accounts controlled by her unidentified colleagues.  (Complaint, ¶ 24.)

Plaintiffs’ allege that Phan, Do and Do’s employer, Chicago Title, formed and operated a conspiracy to defraud them out of their money.  (Complaint, ¶¶ 43-45.)  Plaintiffs further allege that the deeds of trust and promissory notes purportedly executed by certain property owners as security for a portion of the funds invested that were notarized and processed by Chicago Title as escrow holder were not in fact signed by those individuals.  (Id., ¶ 26.)

On December 9, 2013, Chicago Title filed the instant demurrer to each of the seven claims asserted against it in the Complaint, i.e., the second through eighth causes of action, on the grounds of uncertainty and failure to state facts sufficient to constitute a cause of action.  (See Code Civ. Proc., § 430.10, subds. (e) and (f).

Chicago Title’s demurrer on the ground of uncertainty is OVERRULED.  A demurrer for uncertainty is disfavored and sustained only where the allegations of the pleading are so unintelligible that the defendant cannot reasonably respond to them.  (See Khoury v. Maly’s of Calif., Inc. (1993) 14 Cal.App.4th 612, 616; see also Williams v. Beechnut Nutrition Corp. (1986) 185 Cal.App.3d 135, 139, fn. 2.)  The allegations of the Complaint do not qualify as such.

As an initial matter, Chicago Title maintains that no claim has been stated against it in the Complaint because (1) as an escrow company, its only obligation was to follow the escrow instructions provided to it and thus it had no general duty to police the affairs of the parties involved and (2) Do’s investment activities with Phan were outside the course and scope of her duties and thus it has no respondeat superior liability for her conduct.  The Court finds only the former of these arguments to be persuasive.

“An escrow involves the deposit of documents and/or money with a third party to be delivered on the occurrence of some condition.”  (Summit Financial Holdings, Ltd. v. Continental Lawyers Title Co. (2002) 27 Cal.4th 705, 711.)  While an escrow holder is an agent and fiduciary of the parties to the escrow, the agency created by the escrow is “limited to the obligation to the escrow holder to carry out the instructions of each of the parties to the escrow.”  (Id., citing Vournas v. Fidelity Nat. Tit. Ins. Co. (1999) 73 Cal.App.4th 668, 674.)  Accordingly, an escrow holder “has no general duty to police the affairs of its depositors. [Citations.]”  (Id.)  Here, there are no allegations concerning the content of the escrow instructions at issue and thus no facts which demonstrate that Chicago Title breached its obligations as escrow holder.  The Court is also not aware of any authority, and Plaintiffs do not identify any, which provides that an escrow holder has an obligation to verify all signatures before it absent instructions requiring as much.

Consequently, Chicago Title’s demurrer to the sixth (Escrow Negligence), seventh (Negligent Supervision) and eighth (Breach of Fiduciary Duty) causes of action on the ground of failure to state facts sufficient to constitute a cause of action is SUSTAINED WITH 10 DAYS’ LEAVE TO AMEND.

With regard to Chicago Title’s second argument, “[t]he rule of respondeat superior is familiar and simply stated: an employer is vicariously liable for the torts of its employees committed within the scope of the employment.”  (Lisa M. v. Henry Mayo Newhall Memorial Hospital (1995) 12 Cal. 4th 291, 296.)  The term “scope of employment” has been interpreted broadly, with courts holding that “the employer’s liability extends beyond his actual or possible control of the employee to include risks inherent in or created by the enterprise.”  (Farmers Ins. Group v. County of Santa Clara (1995) 11 Cal. 4th 992, 1004.)  Courts have similarly found that “the fact that an employee is not engaged in the ultimate object of his employment at the time of his wrongful act does not preclude attribution of liability to an employer.”  (Id.)  Consequently, “an employer’s vicarious liability may extent to the employee’s negligence, willful and malicious torts, or acts that contravene an express company rule and confer no benefit to the employer.”  (Id.)  Generally, the question of whether an employee has acted within the scope of employment is one of fact; however, it becomes a question of law when “the facts are undisputed and no conflicting inferences are possible.”  (Mary M. v. City of Los Angeles (1991) 54 Cal. 3d 202, 213.)

“[A]n employer may be vicariously liable for an employee’s tort if the employee’s act was an outgrowth of his employment, inherent in the working environment, typical of or broadly incidental to the employer’s business, or, in a general way, foreseeable from the employee’s duties.”  (Purton v. Marriott International, Inc. (2013) 218 Cal.App.4th 499, 505 (internal quotations and citations omitted).)  In the context of respondeat superior liability, foreseeability means that “in the context of the particular enterprise an employee’s conduct is not so unusual or startling that it would seem unfair to include the loss resulting from it among other costs of the employer’s business.”  (Farmers Ins. Group, supra, 11 Cal. 4th at 1004.)  At this juncture of the proceedings, it cannot necessarily be said that Do’s, an escrow officer employed by Chicago Title, alleged falsification of documents relating to the escrow proceedings for the purpose of inducing Plaintiffs to invest with Phan is “so unusual or startling that it would seem unfair to include the loss resulting from it among other costs” of Chicago Title’s business.  Thus, for the purposes of demurrer, Plaintiffs have sufficiently pleaded respondeat superior liability against Chicago Title based on Do’s conduct.

As currently pleaded, Plaintiffs’ fraud claims are insufficient.  The elements of fraud are (1) misrepresentation (false representation, concealment, or nondisclosure), (2) knowledge of falsity (scienter), (3) intent to defraud, i.e., to induce reliance, (4) justifiable reliance, and (5) resulting damage.  (See Lazar v. Superior Court (1996) 12 Cal. 4th 631, 638.)  It is well-settled that fraud claims must be pleaded with particularity; this necessitates pleading facts showing how, when, where, to whom and by what means the alleged misrepresentations were tendered.  (Id. at 645.)  The allegations of Plaintiffs’ second, third and fourth causes of action fail to conform to the foregoing requirements.

Accordingly, Chicago Title’s demurrer to the second (Fraud), third (Fraud in the Inducement) and fourth (Negligent Misrepresentation) causes of action on the ground of failure to state facts sufficient to constitute a cause of action is SUSTAINED WITH 10 DAYS’ LEAVE TO AMEND.

Chicago Title’s demurrer to the fifth cause of action (Violation of Unfair Business Practices Act) on the ground of failure to state facts sufficient to constitute a cause of action is OVERRULED.  Plaintiffs’ claims against Chicago Title are based upon tort and not contract; consequently, the argument asserted by Chicago Title in support of its demurrer relative to this cause of action is inapplicable.

In light of the ruling on Chicago Title’s demurrer, its motion to strike various allegations of the Complaint relating to exemplary and punitive damages and attorney fees is MOOT.