Case Number: EC068416 Hearing Date: August 31, 2018 Dept: NCD

TENTATIVE RULING

Calendar: 4

Date: 8/31/18

Case No: EC 068416 Trial Date: None Set

Case Name: Dekao Group, Inc. v. Zhu, et al.

DEMURRER

[CCP §430.10 et. seq.]

Moving Party: Defendants Minjuan Zhu, Yunchan Guo, HB Graphics, Inc. and

Ecrystal Corporation

Responding Party: Plaintiff Dekao Group, Inc.

Meet and Confer? Yes

RULING:

Defendants’ Demurrer to Second Amended Complaint;

The court in its discretion has considered the opposition to the demurrer, despite the fact that the memorandum is 18 pages long, three pages over the 15 page limit imposed under CRC Rule 3.1113(d) (“no opening or responding memorandum may exceed 15 pages”), only because the reply addresses the entire memorandum. Plaintiff has failed to obtain permission to file a longer memorandum, and is cautioned that the court may in the future refuse to consider pleadings which do not comply with the applicable rules, statutes and orders governing this action.

Demurrer is SUSTAINED WITH LEAVE TO AMEND as to the third cause of action for negligent misrepresentation, on the ground the cause of action alleges intentional misconduct, not negligent conduct.

Demurrer is SUSTAINED WITH LEAVE TO AMEND as to the seventh cause of action for unfair business practices on the ground the cause of action does not appear to seek the available remedies for such a claim, restitution or injunctive relief; damages are not available.

Demurrer is SUSTAINED WITHOUT LEAVE TO AMEND as to the ninth cause of action for unjust enrichment on the ground a stand-alone cause of action for unjust enrichment is not recognized in the state of California. See Melchoir v. New Line Productions, Inc. (2003, 2nd Dist.) 106 Cal. App.4th 779, 793; Levine v. Blue Shield of California (2010) 189 Cal.App.4th 1117, 1138.

Demurrer to all other causes of action and on all other grounds is OVERRULED.

Ten days leave to amend the third and seventh causes of action only.

The parties are ordered to meet and confer in full compliance with CCP § 430.41 before any further demurrer may be filed.

RELIEF REQUESTED:

Sustain demurrer to Second Amended Complaint

CAUSES OF ACTION: from Second Amended Complaint

1) Fraud and Intentional Deceit

2) Intentional Misrepresentation

3) Negligent Misrepresentation

4) Conspiracy to Defraud

5) Breach of Contract

6) Breach of Implied Covenant of Good Faith and Fair Dealing

7) Unfair Business Practices

8) Unjust Enrichment

9) Concealment

10) Breach of Express Warranty

SUMMARY OF FACTS:

Plaintiff Dekao Group, Inc. alleges that defendants Minjuan Zhu and Yunchan Guo set up a California corporation, defendant Ecrystal Corporation, to purchase Seventeen Printing, a company defendants operated from 2013 to 2017, in order to obtain investment-based immigration visas from immigration services. Defendants subsequently set up another California corporation, HB Graphics, Inc., and that some interests of Ecrystal in Seventeen Printing was transferred to HB Graphics.

The complaint alleges that in June of 2017, through business brokers, Ecrystal and HB Graphics listed the Seventeen Printing for sale and subsequently entered into an agreement with plaintiff Dekao to purchase Seventeen Printing. Plaintiff alleged that during the period of negotiation and escrow, defendants Zhu and Guo provided financial documents to Dekao at its request, including a sellers discretionary earnings worksheet (“SDE”) and profit and loss statement (“P&L”), and represented in those documents that from 2013 to 2017, Seventeen Printing made about $230,000 in profit each year. Based on that information Dekao offered an asset purchase price of $550,000, with $100,000 allocated for fixed assets and the remainder for good will. Plaintiff alleges that during the time of due diligence, Zhu and Guo provided some income tax and quarterly tax returns and quarterly wage reports, and Guo repeatedly made assertions that Ecrystal/HB Graphics was in full compliance with state and federal laws.

Plaintiff alleges that upon taking over the printing manufacturer, existing employees began complaining about getting paid through payroll and having to pay payroll taxes, workers’ compensation insurance and unemployment insurance premiums, which led to an internal investigation by Dekao, which revealed that defendants cashed checks received from customers and used the cash to pay employee wages, failed to report payroll taxes or insurance premiums for that cash paid as wages, generated false payroll sheets to avoid tax payments, failed to pay overtime payments according to the law, and that the individual defendants took a portion of cash for their personal use.

Plaintiff alleges that as the result of defendants’ fraudulent conduct, Dekao did not experience the average $230,000, but experienced a loss of roughly $10,000 each month, and that if the concealed financial information had been known, no reasonable person would have purchased the losing business, and plaintiff was induced to make an offer price which was much higher than reasonable.

ANALYSIS:

Procedural

Opposition Exceeds Page Limits

Under CRC Rule 3.1113(d), “no opening or responding memorandum may exceed 15 pages.” Under subdivision (e) a party may apply ex parte on written notice for permission to file a longer memorandum. Absent this permission, “a memorandum that exceeds the page limits of these rules must be filed and considered in the same manner as a late-filed paper.” CRC Rule 3.1113(f). Under CRC Rule 3.1300(d), the court may, in its discretion, refuse to consider a late-filed paper, so long as it so indicates in its minutes or order.

Here, the memorandum, even excluding the lengthy notice and individual demurrers, is nineteen pages long, with no order permitting the filing of a memorandum exceeding the page limits. The court, in its discretion, could refuse to consider the moving papers, but has elected not to do so.

Substantive

First Cause of Action—Fraud and Intentional Deceit, Second Cause of Action—Intentional Misrepresentation, Third Cause of Action—Negligent Misrepresentation and Ninth Cause of Action—Concealment.

To state a cause of action for fraud, plaintiff must plead the following elements: A false representation, actual or implied, or concealment of a matter of fact material to the transaction which defendant had a duty to disclose, or defendant’s promise made without intention to perform; defendant’s knowledge of the falsity; defendant’s intent to deceive; plaintiff’s justifiable reliance thereon; and resulting damage to plaintiff. Pearson v. Norton (1964) 230 Cal.App.2d 1.

Defendants argue that the causes of action are not stated with sufficient specificity as to each of the defendants.

Generally, in a fraud cause of action, a plaintiff must allege specifically how, what, where, to whom and by what means a defendant made a misrepresentation. Stansfield v. Starkey (1990) 220 Cal.App.3d 59, 73. When such a claim is made against a corporation, the level of specificity required is even higher. Under Lazar v. Superior Court, (1996) 12 Cal.4th 631, 645, in fraud complaints against a corporation, a plaintiff must allege all of the following:

-the names of the persons who made the misrepresentation;

-their authority to speak for the corporation;

-to whom they spoke;

-what they said or wrote; and

-when it was said or written.

The pleading alleges in some detail that the individual defendants, sometimes jointly, and sometimes separately, made various specific representations written or oral, or concealments, specify some representations made during negotiations from June of 2017, through the entry of the purchase agreement on November 16, 2017, and further representations during the time of due diligence until the escrow closed on December 19, 2017. [Paras. 6-11, 32-84]. It is alleged that Zhu was the single director for Ecrystal, and also CEO, secretary and CFO, and that Guo was the sole director, CEO, secretary and CFO of HB Graphics, sufficient to show their authority to speak for the corporate parties. [Paras. 3-4]. This is also a case involving allegations of concealment, under which, as pointed out in the opposition, the specificity requirements can be relaxed, as the party alleging facts were concealed would not necessarily know the details. Plaintiff cites Committee on Children’s Television, Inc. v. General Foods Corp. (1983) 35 Cal.3d 197, 217, in which the California Supreme Court recognized that less specificity is required when “it appears from the nature of the allegations that the defendant must necessarily possess full information concerning the facts of the controversy.” (quoting Bradley v. Hartford Acc. & Indem. Co. (1973) 30 Cal.App.3d 818, 825). In any case, there are fairly specific details alleged in this pleading, and the demurrer is overruled to the first, second and ninth causes of action.

With respect to the third cause of action for negligent misrepresentation, the elements of a claim for negligent misrepresentation are: 1) assertion of a false statement; (2) honest belief by the speaker that the statement is true, but without reasonable ground for such belief, (3) justifiable reliance by the plaintiff; and (4) resulting damage. See Anderson v. Deloitte & Touche (1997) 56 Cal.App.4th 1468, 1474-1476.

These elements are not alleged here, as the pleading only alleges intentional misconduct. [Paras. 112-122]. The demurrer is sustained to this cause of action with leave to amend to focus on negligent conduct, if possible.

Fourth Cause of Action—Conspiracy to Defraud

To state a civil conspiracy a pleading must allege a civil wrong (for example, fraud or battery), the formation and operation of the conspiracy, a wrongful act done pursuant to the conspiracy, and resulting damage. Unruh v. Truck Ins. Exchange (1972) 7 Cal.3d 616, 631.

This cause of action is alleged only against Zhu and Guo, incorporates previous allegations and appears to be an attempt to hold Zhu and Guo responsible for the fraudulent conduct of the other, based on allegations that they “worked together,” to boost the business profits to induce plaintiff to enter the contract. [Paras. 123, 125, 129]. The cause of action is sufficiently alleged, and the demurer is overruled.

Defendants argue that this should not be a stand-alone cause of action, but a remedy to be sought in connection with the other claims. However, it appears that a civil wrong has been sufficiently alleged in the cause of action itself, fraud, and the cause of action is permitted to stand.

Fifth Cause of Action—Breach of Contract, Sixth Cause of Action—Breach of Implied Covenant of Good Faith and Fair Dealing, and Tenth Cause of Action—Breach of Express Warranty

To plead a cause of action for breach of contract, plaintiff must plead the following elements: Contract formed and terms alleged verbatim or according to legal effect; plaintiff’s performance or excuse for nonperformance; defendant’s breach; and damage to plaintiff. Walsh v. Standart (1917) 174 Cal. 807.

The pleading alleges the existence of an agreement, which is attached, and that defendants breached terms requiring them to provide accurate financial records, and also breached an indemnity clause. [Paras. 132, 146, 147, 149]. The attached contract includes a promise by Seller that the financial information furnished is complete accurate, and fairly present the financial condition of the business. [Ex. C, para. 10d]. All elements of breach of contract have been alleged.

It is recognized that “Every contract imposes upon each party a duty of good faith and fair dealing in its performance and its enforcement.” Carma Developers (Cal.), Inc. v. Marathon Development California, Inc. (1992) 2 Cal.4th 342, 373, quoting Restatement 2nd Contracts, §205.

The elements of a claim for breach of the implied covenant of good faith and fair dealing are:

1) That plaintiff and defendant entered into a contract;

2) That plaintiff did all, or substantially all of the significant things that the contract required plaintiff to do or that plaintiff was excused from having to do those things;

3) That all conditions required for defendant’s performance had occurred;

4) That defendant unfairly interfered with plaintiff’s right to receive the benefits of the contract; and

5) That plaintiff was harmed by defendant’s conduct.

See CACI 325.

These elements are alleged at paragraphs 151-159, and may be alleged in the alternative to the fraud and concealment causes of action.

As for breach of express warranty, defendants argue that the claim is not sufficiently stated under the UCC. However, the opposition seems to concede that the cause of action is a breach of an express warranty in the contract between the parties, which is sufficiently stated.

The individual defendants argue that the pleading fails to sufficiently allege alter ego liability to hold them responsible for conduct they engaged in on the part of the corporate defendants.

Disregarding a corporate entity has two requirements: 1) There must be such unity of interest and ownership that the separate personalities of the corporation and the individual no longer exist; and 2) it must be demonstrated that if the acts are treated as those of the corporation, an inequitable result will follow. Minifie v. Rowley (1921) 187 Cal. 481, 487.

In Associated Vendors v. Oakland Meat Co. (1962) 210 Cal.App.2d 825, the court set out several factors to be considered in making an alter ego determination, including, among many, the commingling of funds and assets, treating the corporate assets as the assets of the individual, the holding out by an individual that he is personally responsible for the corporate debts, the failure to maintain minutes or adequate corporate records, the disregard of legal formalities, and the failure to adequately capitalize a corporation. Associated Vendors, at 838-840. The court of appeal noted that in the cases in which alter ego liability has been found, “in all instances several of the factors mentioned were present.” Associated Vendors, at 840.

Here, the pleading alleges in some detail the common ownership, the failure to observe corporate formalities, including having no meetings, bylaws, minutes, records of stock, that defendants took corporate funds to pay for family expenses, and that an inequitable result will follow if the corporate veil is not pierced, as the individuals personally took assets which should have been available from the corporate entities. [Paras. 78-85, 143-145]. The demurrer on this ground also is overruled.

Seventh Cause of Action—Unfair Business Practices

To state a cause of action for Unfair Business Practices, a plaintiff must allege the following elements:

1) Defendant has engaged in more than one unlawful, unfair, or fraudulent transaction, including unfair, deceptive, untrue or misleading advertising

2) Plaintiff’s right to restitution, if any. Damages are not recoverable.

3) Plaintiff’s right to injunctive relief, if any.

Bus. & Prof. Code § 17200 et seq.; Dean Witter Reynolds, Inc. v. Superior Court (1989) 211 Cal.App.3d 758.

The pleading alleges fraudulent business practices, as alleged above, but does not appear to allege any right to restitution or injunctive relief, but appears to seek only damages. [See para. 179]. Under the Unfair Practices Act, the only available remedies in individual private actions for violation of the act are an injunction or restitution. Business & Professions Code sec. 17203; Korea Supply Co. V. Lockheed Martin Corp. (2003) 29 Cal. 4th 1134, 1145-1146. A plaintiff may not recover damages, treble damages or other penalties, or attorney’s fees. Bank of the West v. Superior Court (1992) 2 Cal.4th 1254, 1266.

The demurrer is sustained to require plaintiff to more clearly allege entitlement to remedies available under the UCL. The demurrer on all other grounds is overruled, as there are clear allegations that plaintiff lost money, and of fraudulent practices.

Eighth Cause of Action—Unjust Enrichment

Defendants argue that there is no such stand-alone cause of action recognized in California. In Melchoir v. New Line Productions, Inc. ( 2003, 2nd Dist.) 106 Cal. App.4th 779, the Second District affirmed the granting of summary judgment, noting:

“In addition, as the trial court observed, there is no cause of action in California for unjust enrichment. “The phrase ‘Unjust Enrichment’ does not describe a theory of recovery, but an effect: the result of a failure to make restitution under circumstances where it is equitable to do so.” (Lauriedale Associates, Ltd. v. Wilson (1992) 7 Cal.App.4th 1439, 1448 [9 Cal. Rptr. 2d 774].) Unjust enrichment is ” ‘a general principle, underlying various legal doctrines and remedies,’ ” rather than a remedy itself. (Dinosaur Development, Inc. v. White (1989) 216 Cal. App. 3d 1310, 1315 [265 Cal. Rptr. 525].) It is synonymous with restitution. (Id. at p. 1314.)”

Melchoir, at 793.

In Levine v. Blue Shield of California (2010) 189 Cal.App.4th 1117, the Fourth District affirmed the trial court’s sustaining of a demurrer to an unjust enrichment claim where no other cause of action, such as fraud, misrepresentation, or unfair competition, giving rise to a claim for restitution, had been sufficiently stated.

“Although some California courts have suggested the existence of a separate cause of action for unjust enrichment (Peterson v. Cellco Partnership (2008) 164 Cal.App.4th 1583, 1593 [80 Cal. Rptr. 3d 316] [listing elements]), this court has recently held that ‘[t]here is no cause of action in California for unjust enrichment.’ [Citations.] Unjust enrichment is synonymous with restitution. [Citation.]” (Durell, supra, 183 Cal.App.4th at p. 1370.) Thus, the Levines’ unjust enrichment claim does not properly state a cause of action.”

Levine, at 1138.

The unjust enrichment cause of action appears to seek to void the contract, and that if the contract be voided, seeks the return of what defendants received. [Para. 193]. This is not a proper stand alone claim, and the demurrer is sustained without leave to amend.