Case Name: Headstart Nursery, Inc., et al. v. Uesugi Farms Incorporated, et al.
Case No.: 18CV339263

This action arises primarily from a dispute between Plaintiffs Headstart Nursery, Inc. and T and C Supplies, Inc. (“Plaintiffs”) and Defendant Uesugi Farms Incorporated (“Uesugi”) over Uesugi’s non-payment for agricultural supplies (seeds and transplants) provided by Plaintiffs. Plaintiffs’ operative First Amended Complaint (“FAC”) filed January 9, 2019 five causes of action: 1) Breach of Contract, alleged by Plaintiff Headstart Nursery against Uesugi only; 2) Breach of Contract, alleged by Plaintiff T and C Supplies, Inc. against Uesugi only); 3) Common Count—Goods and Services Rendered, alleged by both Plaintiffs against Uesugi only; 4) Unjust Enrichment (mislabeled as a common count ), alleged by both Plaintiffs against Defendant Heritage Bank of Commerce (“HBC”), Uesugi’s secured creditor, and; 5) Declaratory Relief, alleged by Plaintiffs against HBC only.

Currently before the Court is Defendant HBC’s demurrer to the FAC’s fourth and fifth causes of action. HBC demurs to both causes of action on one ground only, that they both fail to state sufficient facts. (See HBC’s Notice of Demurrer and Demurrer at pp. 1:26-2:2.)

Request for Judicial Notice
A precondition to judicial notice in either its permissive or mandatory form is that the matter to be noticed be relevant to the material issue before the Court. (Silverado Modjeska Recreation and Park Dist. v. County of Orange (2011) 197 Cal.App.4th 282, 307, citing People v. Shamrock Foods Co. (2000) 24 Cal.4th 415, 422 fn. 2.)

In support of its demurrer HBC has submitted a request for the Court to take judicial notice of three documents (attached to the request as exhibits 1-3) “pursuant to Evidence Code §§ 451, 452 and California Code of Civil Procedure [“CCP”] §430.30(a).” (Request at p. 1:22-23.) HBC fails to identify the specific basis on which it believes the documents can be noticed and the request could be denied outright on that basis. Evidence Code §453(b) requires a party seeking notice to “[furnish] the court with sufficient information to enable it to take judicial notice of the matter.”

Exhibit 1 is a copy of a UCC Financing Statement dated July 26, 2013, apparently reflecting information submitted by an unidentified party, which identifies HBC as a secured creditor of Uesugi. Exhibit 2 is a copy of an amendment to a UCC Financing Statement filed by an unidentified party on March 14, 2018. It includes an attached addendum restating the collateral to include, among other things, the debtor’s crops. Exhibit 3 is a copy of an Information Request form submitted by an unidentified entity on December 5, 2018 seeking information on Uesugi from the California Secretary of State’s Office. Attached to it is a “Search Certificate” showing certain debts of Uesugi’s certified by the Secretary of State’s Office as “a record of all presently active financing statements, tax liens, attachment liens and judgment liens, including any change documents relating to them, which name the above debtor, subject to any above-stated search qualifiers and are on file in my office as of 12/02/2018 at 1700 hours. The search results herein reflect only the specific information requested.”

Notice of exhibits 1 and 2 is DENIED. Information submitted by private parties to government entities (on official forms, etc.) does not become noticeable as an official record or act under Evidence Code §452(c) and HBC has not identified any specific basis for the request. (See Stevens v. Superior Court (1999) 75 Cal.App.4th 594, 607-608 [applications and supporting documents filed by private parties with Department of Insurance were not official acts of department subject to judicial notice]; People v. Thacker (1985) 175 Cal.App.3d 594, 598-599 [copies of articles of incorporation, statement by domestic corporation, and notice of issuance of shares were materials prepared by private person, merely on file with state agencies, and not official acts].)

Notice of exhibit 3 is GRANTED pursuant to Evidence Code §452(c) only. The contents of the document are only noticed to the extent they are an official record of the results of the search conducted by the Secretary of State’s office for “presently active financing statements,” etc. relating to Uesugi on file with the Secretary of State “as of 12/02/2018 at 1700 hours.”

In short, HBC’s request for judicial notice is not well presented. Ultimately, as it is undisputed that HBC is a secured creditor of Uesugi’s (See FAC at ¶39 and Plaintiffs’ Opp. at p. 5:20-24.) the request has little relevance to any material issue before the Court on this demurrer.

Demurrer to FAC
The Court in ruling on a demurrer treats it “as admitting all material facts properly pleaded, but not contentions, deductions or conclusions of fact or law.” (Piccinini v. Cal. Emergency Management Agency (2014) 226 Cal.App.4th 685, 688, citing 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.)

Allegations are not accepted as true on demurrer if they contradict or are inconsistent with facts judicially noticed. Similarly, facts appearing in exhibits attached to the complaint (part of the “face of the pleading”) are given precedence over inconsistent allegations in the complaint. (See Holland v. Morse Diesel Int’l, Inc. (2001) 86 Cal.App.4th 1443, 1447; Cansino v. Bank of America (2014) 224 Cal.App.4th 1462, 1474 [rejecting allegation contradicted by judicially noticed facts]; See also Barnett v. Fireman’s Fund Ins. Co. (2001) 90 Cal.App.4th 500, 505 [“[T]o the extent the factual allegations conflict with the content of the exhibits to the complaint, we rely on and accept as true the contents of the exhibits and treat as surplusage the pleader’s allegations as to the legal effect of the exhibits.”])

The Court cannot consider extrinsic evidence when ruling on a demurrer. Accordingly, the Court has not considered the declaration of Plaintiffs’ Counsel Patrick Markham filed with the opposition to the demurrer.

Fourth Cause of Action—Unjust Enrichment
The FAC’s fourth causes of action alleges that HBC was unjustly enriched by collecting (as Uesugi’s secured creditor) the funds Uesugi received by selling the crop grown with the materials provided by Plaintiffs, funds that could have been used to repay Plaintiffs.

While there has been some debate as to its elements or whether it constitutes an independent cause of action, California authorities consistently recognize a common law claim based on principles of reimbursement and restitution due to unjust enrichment. (See, e.g., Hartford Cas. Ins. Co. v. J.R. Mktg., LLC (2015) 61 Cal.4th 988, 998 [discussing cause of action for unjust enrichment entitling plaintiff to reimbursement]; Hirsch v. Bank of America (2003) 107 Cal.App.4th 708, 721-722 [plaintiffs stated “a valid cause of action for unjust enrichment based on” defendants’ unjust retention of fees at the expense of plaintiffs]; Lectrodryer v. SeoulBank (2000) 77 Cal.App.4th 723, 726 [plaintiff “satisfied the elements for a claim of unjust enrichment” by alleging receipt and unjust retention of a benefit at the expense of another].)

There are limitations on the reach of such a claim. For example, “[r]estitution based on unjust enrichment is not available, however, if an enforceable express contract determines the parties’ rights and obligations.” (Chapman v. Skype, Inc. (2013) 220 Cal.App.4th 217, 234.) Another such limitation on its reach is the inability of a claim for unjust enrichment to displace the rights of secured creditor in most circumstances. The Court in Knox v. Phoenix Leasing Inc. (1994) 29 Cal.App.4th 1357, the primary authority relied upon by HBC in its demurrer, held that a claim for unjust enrichment will not normally subordinate the lien of a secured creditor. “[U]nless there are unusual circumstances the equitable remedy of restitution must defer to the rights given a secured creditor by the California Uniform Commercial Code.” (Id. at p. 1359.) Unusual circumstances would include situations where the “‘secured creditor initiates or encourages transactions between the debtor and suppliers of goods or services, and benefits from the good or services supplied to produce such debts.’ These situations present a fertile opportunity for trapping the unwary. If what the secured creditor did or failed to do can be reached by the doctrines of estoppel, misrepresentation not amounting to fraud, or mistake, the code [Commercial Code §1103] allows redress to an innocent supplier . . . If it had an active hand in promoting a transaction that goes bad, a secured creditor should not escape with a victimized supplier left behind holding an empty bag alone. In simple terms, the creditor should not be allowed to profit from the wrong of its own bad faith.” (Id. at 1365, internal citations omitted, brackets added. See also Atascadero Factory Outlets, Inc. v. Augustini & Wheeler LLP (2000) 83 Cal. App.4th 717, 710-721 [discussing Knox].)

HBC’s demurrer to fourth cause of action on the ground that it fails to state sufficient facts is SUSTAINED WITH 10 DAYS’ LEAVE TO AMEND. The FAC at ¶¶41-42 alleges that “HBC released to Uesugi sufficient funds to defraud Plaintiffs to believe there were sufficient funds for payment of the transplants on credit, but after all plants were received, HBC refused to release funds to pay the balance of $1,268,267.88. . . . HBC substantially increased its recovery from Uesugi when in the fall of 2018, HBC received all revenue from the crop generated by Plaintiffs’ plants.” This is insufficient to bring this dispute within the “unusual circumstances” identified in Knox.

The FAC does not allege that HBC and Plaintiffs were even aware of one another when Plaintiffs contracted with Uesugi, much less allege that HBC initiated or encouraged the specific transactions between Plaintiffs and Uesugi that led to the present lawsuit, or that HBC made any misrepresentations to Plaintiffs as to Uesugi’s finances or regarding its own willingness to pay for business costs incurred by Uesugi. Simply releasing funds to Uesugi to allow it to continue operations and generate funds to be paid to its secured creditor is not unjust enrichment. Nor does the FAC allege that HBC did anything to conceal its relationship with Uesugi or to prevent Plaintiffs from performing their own due diligence by checking the publicly available information regarding Uesugi’s finances, including information identifying secured creditors. “Basing unjust enrichment liability on acquiescence would turn the filing system on its head, destroying existing creditors’ reliance on that system and substituting a prospective creditor’s duty to check with a new duty to warn and disclaim imposed on existing creditors. It would in plain effect reward ignorance and establish an incentive for ignoring the filing system. Acquiescence liability . . . cannot be accepted.” (Knox, supra, 29 Cal.App.4th at p. 1367.)

As this is the first pleading challenge in this action and Plaintiffs in their opposition assert that they can amend to state additional facts supporting allegations that HBC initiated the transactions with Plaintiffs, leave to amend is appropriately granted.

Plaintiffs are cautioned that when a demurrer is sustained with leave to amend, the leave must be construed as permission to the pleader to amend the causes of action to which the demurrer has been sustained, not add entirely new causes of action. (Patrick v. Alacer Corp. (2008) 167 Cal.App.4th 995, 1015.) To raise claims entirely unrelated to those originally alleged requires either a new lawsuit or a noticed motion for leave to amend. Absent prior leave of court an amended complaint raising entirely new and different causes of action may be subject to a motion to strike. (See also Harris v. Wachovia Mortg., FSB (2010) 185 Cal.App.4th 1018, 1023 [“Following an order sustaining a demurrer or a motion for judgment on the pleadings with leave to amend, the plaintiff may amend his or her complaint only as authorized by the court’s order. The plaintiff may not amend the complaint to add a new cause of action without having obtained permission to do so, unless the new cause of action is within the scope of the order granting leave to amend.”])

Fifth Cause of Action—Declaratory Relief
The FAC’s fifth cause of action, apparently brought by Plaintiff Headstart only, alleges that “an actual controversy now exists between Plaintiff and Defendant HBC, in that Plaintiff contends that Defendant HBC’s secured interest in the proceeds received from the plants supplied by Headstart is subordinate to Plaintiff’s right to be paid for those plants.” (FAC at ¶45.)

HBC’s demurer to the FAC’s fifth cause of action for declaratory relief on the ground that it fails to state sufficient facts because it is duplicative of the unjust enrichment claim is OVERRULED.

A general demurrer is usually not an appropriate method for testing the merits of a declaratory relief action because the plaintiff is entitled to a declaration of rights even if it is adverse to the plaintiff’s interest. (Qualified Patients Assn. v. City of Anaheim (2010) 187 Cal App 4th 734, 752.) When a complaint sets forth facts showing the existence of an actual controversy between the parties relating to their respective legal rights and duties and requests that these rights and duties be adjudged, the plaintiff has stated a legally sufficient complaint for declaratory relief. It is an abuse of discretion for a judge to sustain a demurrer to such a complaint and to dismiss the action, even if the judge concludes that the plaintiff is not entitled to a favorable declaration. (Id. at 756. See also Lockheed Corp. v. Continental Ins. Co. (2005) 134 Cal.App.4th 187, 221 [“demurrer is a procedurally inappropriate method for disposing of a complaint for declaratory relief.”)]

Defendant’s only argument in support of the demurrer to this cause of action (that it fails to state sufficient facts because it is wholly derivative of the unjust enrichment claim) is also unpersuasive as it misstates the authority on which it relies. When a plaintiff fails to state sufficient facts to support a statutory claim, a demurrer is properly sustained on a claim for declaratory relief that is “wholly derivative” of the statutory claim. (See Ball v. FleetBoston Financial Corp. (2008) 164 Cal.App.4th 794, 800 [where claim that arbitration provisions of credit card agreement violated California Legal Remedies Act was precluded because issuance of credit to consumers was outside scope of Act, plaintiff could not amend complaint to add cause of action for declaratory relief that was wholly derivative of that claim].) Plaintiffs’ unjust enrichment claim is plainly not a statutory claim and HBC could not reasonably believe otherwise.