Case Name: Patitucci v. Malibu Ceramic Works, Inc.

Case No.: 1-13-CV-249561

Plaintiff/cross-defendant Frank M. Patitucci and cross-defendant Shirley Dinkins (collectively, “Cross-Defendants”) demur to the first amended cross-complaint (“FACC”) filed by defendants/cross-complainants Malibu Ceramic Works, Inc. (“MCW”) and Robert Harris.

This dispute arises out of an agreement to purchase a ceramic tile business, Handcraft Tile, Inc. (“Handcraft”), formerly owned and operated by Patitucci and Dinkins. In March of 2007, Cross-Defendants and MCW entered into a written agreement pursuant to which MCW acquired the stock of Handcraft. (Complaint at ¶ 9.) According to Patitucci’s complaint, Harris personally guaranteed payment of the purchase price of the business. (Id. at ¶ 1.) Patitucci further alleges that MCW and Harris breached the terms of the purchase agreement by failing to make the payments required under the agreement. (Id. at ¶ 18.)

Conversely, MCW and Harris allege in the FACC that Cross-Defendants misrepresented and concealed several material facts regarding Handcraft’s condition, including the reasons why its distribution network had dissolved, the fact that the equipment purchased could not be reliably replicated or reproduced, and the fact that the equipment purchased was not in working order. (FACC at ¶ 17.) MCW further alleges that Cross-Defendants breached the agreement by failing to provide all necessary information, proprietary rights, and processes necessary for the business to be conducted. (Id. at ¶ 11.)

On March 12, 2014, Cross-Defendants filed this demurrer on the ground of failure to state facts sufficient to constitute a cause of action, addressing the second cause of action for breach of the implied covenant of good faith and fair dealing; the third cause of action for intentional misrepresentation; the fourth cause of action for negligent misrepresentation; the fifth cause of action for fraud [concealment]; and the sixth cause of action for breach of agreement. (Code Civ. Proc., § 430.10, subd. (e).)

Cross-Defendants first assert that the second cause of action for breach of the implied covenant of good faith and fair dealing is deficient because there was no obligation under the agreement between the parties for them to continue hosting the Handcraft website. This cause of action is predicated on allegations that, for four months in 2009, Cross-Defendants deliberately caused the Handcraft website, which was being utilized by MCW to market Handcraft products, to be shut down. (FACC at ¶ 15.)

“There is in every contract a covenant by each party not to do anything which will deprive the other parties thereto of the benefits of the contract…. This covenant not only imposes upon each contracting party the duty to refrain from doing anything which would render performance of the contract impossible by an action of his own, but also the duty to do everything that the contract presupposes that he will do to accomplish its purpose.” (Marathon Dev. Calif. (1992) 2 Cal.4th 342, 371.) “If there exists a contractual relationship between the parties …, 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.” (Racine & Laramie, Ltd. v. Department of Parks & Recreation (1992) 11 Cal.App.4th 1026, 1032.)

The Court previously sustained Cross-Defendants’ demurrer to this cause of action because MCW and Harris failed to identify any express term of the Stock Purchase Agreement creating an implied obligation to continue hosting the Handcraft website. In an attempt to correct this deficiency, MCW and Harris have additionally alleged in the FACC that “paragraph 2.8 of the Agreement expressly provides that cross-defendants (denoted as Sellers under the Agreement) would take those actions reasonably requested for MCW to accomplish the ends of the Agreement. In accordance with section 2.8 of the Agreement, MCW thus requested and cross-defendants agreed to and continued to host the Handcraft website (for a fee) for MCW, knowing it would be used by MCW to market such tiles, as it was.” (FACC at ¶ 15.)

Section 2.8 of the Stock Purchase Agreement provides:

2.8. Further Assurances. In addition to the actions, documents and instruments specifically required to be taken or delivered hereby, Sellers, Company, and Purchase, whether before or after the Closing Date, shall execute and deliver such other instruments or such other actions as a party, or its counsel, may reasonably request in order to complete the transaction contemplated by this Agreement.

This provision is about executing and delivering documents and taking “such other actions” necessary to complete the transaction; it does not relate in any way to hosting the Handcraft website. MCW and Harris’s attempt to turn this generalized provision into an express term creating an implied obligation on the part of Cross-Defendants to continue hosting the website is unavailing; such a conclusion would not comport with rule that the implied covenant of good faith and fair dealing “cannot impose substantive duties or limits on the contracting parties beyond those incorporated in the specific terms of [the parties’] agreement.” (Guz v. Bechtel National, Inc. (2000) 24 Cal.4th 317, 349-350.) This is not to say that MCW and Harris’s allegation that Cross-Defendants agreed, upon their request, to continue hosting the Handcraft website and then ceased doing so will not support a tort claim; however, these allegations do not state a claim for breach of the implied covenant of good faith and fair dealing.

In accordance with the foregoing analysis, Cross-Defendants’ demurrer to the second cause of action on the ground of failure to state facts sufficient to constitute a cause of action is SUSTAINED WITHOUT LEAVE TO AMEND.

Cross-Defendants’ demurrer to the third, fourth and fifth causes of action (i.e., MCW and Harris’ claims for fraud) on the ground of failure to state facts sufficient to constitute a cause of action is OVERRULED. MCW and Harris have pleaded these claims with the requisite specificity. Moreover, contrary to Cross-Defendants’ assertion that MCW and Harris must specifically plead the factual basis for how Cross-Defendants “knew” the representations being made were false, “because knowledge is a fact, it is sufficiently pleaded by the general averment that the defendant knew the representation was false.” (5 Witkin, California Procedure (5th ed. 2008) Pleading, § 726, p. 142.) MCW and Harris have pleaded such an averment. (FACC at ¶ 18.)

MCW and Harris’s sixth cause of action for breach of agreement is predicated on allegations that, in late 2009, after Patitucci threatened to take legal action against MCW and Harris for their alleged breaches of the Stock Purchase Agreement, the parties modified the agreement, agreeing to forego legal proceedings and continue with the purchase agreement “as best” they could. (FACC at ¶ 34.) In the original Cross-Complaint, MCW and Harris alleged that the agreement was modified by way of a three-paragraph email from Patitucci to Harris. Cross-Defendants’ prior demurrer to this cause of action was sustained for two reasons. First, the purchase agreement expressly provides that no modification “shall be binding unless executed in writing by all of the parties. (FACC, Exhibit 1 at § 9.5; emphasis added.) MCW and Harris had not pleaded that such a writing was executed. Second, Patitucci’s statements that “we have no option but to continue the current arrangement as best we can” and that he “will be patient and expect that as your business improves you will make reasonable efforts to make payments against the note” were too vague to constitute a separately enforceable agreement. (See e.g. Coldwell Banker & Co. v. Pepper tree Office Center Associates (1980) 106 Cal.App.3d 272, 280, fn. 1.)

In an effort to correct these deficiencies, MCW and Harris have merely added the word “written” to the allegation that “an agreement [to modify] was reached, including as set forth in writing in Patitucci’s email to cross-defendants of September 8, 2009 ….” (FACC at ¶ 34.) However, beyond reference to the email and its contents, which have already been deemed insufficient on their own to constitute a separately enforceable agreement, MCW and Harris have not otherwise pled specific terms of a “written agreement” they are alleged to have reached with Cross-Defendants, or attached a copy of it. In contract actions based on a written agreement, the agreement must be “set out verbatim in the complaint, attached as an exhibit or [] pleaded in full accordance with its legal effect.” (Staples v. Arthur Murray, Inc. (1967) 253 Cal.App.2d 507, 513.) Having failed to comply with the foregoing requirement, MCW and Harris have not sufficiently pleaded a claim for breach of agreement. Consequently, Cross-Defendants’ demurrer to the sixth cause of action on the ground of failure to state facts sufficient to constitute a cause of action is SUSTAINED WITHOUT LEAVE TO AMEND.