Case Name: Sommer, et al. v. Celebuddy, Inc., et al.
Case No.: 16CV302966

Plaintiffs/cross-defendants Robert Sommer and William Sommer (“Cross-Defendants”) move for judgment on the pleadings in their favor as to the cross-complaint (“Cross-Complaint”) filed by defendants/cross-complainants Celebuddy, Inc. (“Celebuddy”) and John Tran (“Tran”) (collectively, “Cross-Complainants”).

I. Factual and Procedural Background

This action arises out of a commercial lease dispute. According to the allegations of the underlying complaint (the “Complaint”), pursuant to a written agreement dated July 16, 2015 (the “Lease”), Cross-Defendants leased a commercial real property located at 1566 South 7th Street in San Jose (the “Premises”) to Celebuddy for the purpose of operating a medical cannabis facility. (Complaint, ¶¶ 1, 4, Exhibits A and B.) Tran, the President of Celebuddy, signed a written Guaranty of the Lease on August 27, 2015 (the “Guaranty”). (Id., ¶ 5, Exhibit C.)

On September 20, 2016, Cross-Defendants served Celebuddy with a written Notice of Taking Ownership of Improvements pursuant to the Lease, taking ownership of all alterations and utility installations on the Premises. (Complaint, ¶¶ 7, 8; Exhibit D.) Following service, Cross-Complainants wrongfully removed the foregoing items from the Premises, causing damage in the process. (Id., ¶ 9.) Despite a request that they cease and desist, Cross-Complainants affirmatively stated that they intended to continue to remove Cross-Defendants’ property from the Premises, including the HVAC and electrical utility systems. (Id., ¶ 10.)

Based on the foregoing allegations, Cross-Defendants filed the Complaint on November 21, 2016, asserting the following causes of action: (1) breach of contract (Lease) (against Celebuddy); (2) breach of contract (Guaranty) (against Tran); (3) waste (against Cross-Complainants); and (4) conversion (against Cross-Complainants).

Cross-Complainants filed the Cross-Complaint on December 29, 2016, asserting the following causes of action: (1) fraud; (2) fraud and deceit by negligent misrepresentation; (3) fraud and deceit by suppression of facts; (4) unjust enrichment; (5) intentional interference with prospective economic advantage; (6) negligent interference with prospective economic advantage; (7) breach of implied covenant of good faith and fair dealing; (8) breach of contract; (9) tortious interference with a contract; and (10) declaratory relief. According to the allegations of the Cross-Complaint, the City of San Jose (the “City”) required Medical Cannabis Facilities to submit a Zoning Verification Certificate by July 17, 2015. (Cross-Complaint, ¶ 9.) In order to obtain such a certificate, Cross-Complainants needed a signed lease and/or authorization letter from their prospective landlord; this is why the Lease was signed on July 16, 2015. (Id.)

At the time of negotiation of the Lease, Cross-Complainants informed Cross-Defendants that the City had set a strict deadline for compliance with its Medical Cannabis Facilities registration process, which required that certain actions be completed by December 18, 2015. (Cross-Complaint, ¶ 12.) Cross-Complainants were concerned that the foregoing process meant that all construction needed to be completed by December 18, 2015, but Cross-Defendants would not let them commence construction until November 2015 because the Premises was being occupied by another tenant. (Id., ¶ 13.) Ultimately, through no fault of their own, Cross-Complainants were unable to complete construction prior to the aforementioned deadline, resulting in their disqualification from the Medical Cannabis Facilities registration process. (Id., ¶ 16.) Unable to operate a medical cannabis facility without risking prosecution, Cross-Complainants requested to terminate the Lease due to impossibility/impracticability and frustration of purpose but were told by Cross-Defendants that they would be held liable for the remaining five year term of the Lease. (Id., ¶ 19.)

In January 2015, Cross-Complainants began looking for a registered Medical Cannabis Facility to occupy the Premises as a sub-tenant subject to Cross-Defendants’ approval as stipulated in the Lease. (Cross-Complaint, ¶ 19.) Cross-Complainants located several prospective sub-tenants and began conversations with them. (Id., ¶¶ 20-23.) Cross-Defendants began making demands outside of the Lease as it related to Cross-Complainants’ potential agreement with White Fire, a prospective sub-tenant. (Id., ¶¶ 23-25.) On September 19, 2016, Cross-Defendants sent Cross-Complainants a ten-day notice to pay or quit. (Id., ¶ 26.) Cross-Complainants allege on information and belief that the notice was sent in retaliation for their not being in agreement with Cross-Defendants’ demands. (Id., ¶ 26, Exhibit 2.)

Cross-Defendants subsequently sent Cross-Complainants an email stating that they were taking ownership of all of the latter’s equipment, improvements, HVAC, air scrubbers and grow light fixtures pursuant to the Lease. (Cross-Complaint, ¶ 27.) Cross-Complainants allege that Cross-Defendants’ efforts to take the foregoing items, which they assert qualified as “trade fixtures” under the Lease that were distinct from alterations and utility installations, was an attempt to circumvent payments to Cross-Complainants by White Fire. (Id., ¶ 31.) They further allege that Cross-Defendants unreasonably withheld consent to the assignment of the Lease for their own personal gain. (Id., ¶ 32.)

II. Cross-Defendants’ Request for Judicial Notice

In support of their motion for judgment on the pleadings, Cross-Defendants request that the Court take judicial notice of the following items: (1) the Complaint in this action (Exhibit 1); (2) Cross-Complainants’ Answer to the Complaint, filed December 29, 2016 (Exhibit 2); (3) the Cross-Complaint (Exhibit 3); (4) Cross-Defendants’ Complaint for Unlawful Detainer, Case No. 16CV302985, entitled Sommer, et al. v. Celebuddy, Inc., filed November 21, 2016 (the “UD Action”) (Exhibit 4); (5) Cross-Defendants’ Request for Entry of Default in the UD Action, filed December 2, 2016 (Exhibit 5); and (6) the Clerk’s Judgment entered in the UD Action on December 9, 2016 granting Cross-Defendants’ possession of the Premises (Exhibit 6). As these materials are court records, they are proper subjects of judicial notice pursuant to Evidence Code section 452, subdivision (d). Consequently, Cross-Defendants’ request for judicial notice is GRANTED.

III. Cross-Defendants’ Motion for Judgment on the Pleadings

Cross-Defendants’ motion is directed at each of the ten causes of action asserted in the Cross-Complaint, with them contending that Cross-Complainants have failed to state facts sufficient to state these claims.

The first three causes of action in the Cross-Complaint are for various species of fraud (intentional misrepresentation, negligent misrepresentation and suppression of facts). Cross-Defendants maintain that these claims are deficient because they have not been pleaded with the requisite specificity. This assertion is well taken.

The elements of a claim for fraud are: (1) misrepresentation (false representation, concealment, or nondisclosure); (2) knowledge of falsity (or ‘scienter’); (3) intent to defraud, i.e., to induce reliance; (4) justifiable reliance; and (5) resulting damage.” (Lazar v. Superior Court (1996) 12 Cal.4th 631, 638 (Lazar).) “Fraud actions are subject to strict requirements of particularity in pleading. … Accordingly, the rule is everywhere followed that fraud must be specifically pleaded.” (Committee on Children’s Television, Inc. v. General Foods Corp. (1983) 35 Cal.3d 197, 216.) “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.” (Commonwealth Mortgage Assurance Co. v. Superior Court (1989) 211 Cal.App.3d 508, 518.) The particularity requirement necessitates “pleading facts which ‘show how, when, where, to whom, and by what means the representations were tendered.’” (Lazar, supra, 12 Cal.4th at 645.)

Here, Cross-Complainants’ fraud claims fall woefully short of the foregoing standard. They do not specify the exact misrepresentations purportedly made to them, when they were made, in what manner and by whom. Nor do they set forth what facts were allegedly suppressed by Cross-Defendants. Further, Cross-Complainants have not pleaded any facts regarding reliance on any false statements and how they were damaged as a result of that reliance. Consequently, Cross-Defendants’ motion for judgment on the pleadings as to the first, second and third causes of action on the ground of failure to state facts sufficient to constitute a cause of action is GRANTED WITH 10 DAYS’ LEAVE TO AMEND.

The next cause of action at issue is the fourth for unjust enrichment, which generally alleges that Cross-Defendants have been unjustly enriched as a result of the conduct alleged in the Cross-Complaint and received a benefit from Cross-Complainants “in the form of payments of rent and improvement including, but not limited to, trade fixtures, alterations and utility installations.” (Cross-Complaint, ¶ 54-55.) Cross-Defendants maintain that this claim is defective on its face because it is a quasi-contractual cause of action that cannot lie because the parties have an enforceable agreement- the Lease.

Indeed, unjust enrichment is a quasi-contractual claim that provides for the equitable remedy of restitution, which is “an obligation (not a true contract) created by the law without regard to the intention of the parties, and is designed to restore the aggrieved party to his or her former position by return of the thing or its equivalent in money.” (Federal Deposit Ins. Corp. v. Dintino (2008) 167 Cal.App.4th 333, 348 [internal citations omitted].) As Cross-Defendants assert, “[a] plaintiff may not … pursue or recover on a quasi-contract claim if the parties have an enforceable agreement regarding a particular subject matter.” (Klein v. Chevron U.S.A., Inc. (2012) 202 Cal.App.4th 1342, 1388.) Here, the benefits alleged to have been unjust obtained by Cross-Defendants- rent, trade fixtures, alterations and utility installations- are the subject of the Lease agreement between the parties. Consequently, Cross-Complainants cannot pursue a claim for unjust enrichment predicated on Cross-Defendants’ retention of those items. Cross-Complainants do not address this cause of action in their opposition, thus impliedly conceding the merits of Cross-Defendants’ argument. Therefore, Cross-Defendants’ motion for judgment on the pleadings as to the fourth cause of action on the ground of failure to state facts sufficient to constitute a cause of action is GRANTED WITHOUT LEAVE TO AMEND.

The fifth cause of action is for intentional interference with prospective economic advantage and is predicated on allegations that Cross-Defendants’ intentionally acted to disrupt Cross-Complainants’ prospective economic relationships with the various subtenants. (Cross-Complaint, ¶ 60-62.) Cross-Defendants contend that their demurrer to this claim should be sustained because Cross-Complainants have not pleaded all of the necessary elements.

The elements of a claim for intentional interference with prospective economic advantage are (1) an economic relationship between the plaintiff and some third party, with the probability of future economic benefit to the plaintiff; (2) the defendant’s knowledge of the relationship; (3) intentional acts on the part of the defendant designed to disrupt the relationship; (4) actual disruption of the relationship; and (5) economic harm to the plaintiff proximately caused by the acts of the defendant. (Korea Supply Co. v. Lockheed Martin Corp. (2003) 29 Cal.4th 1134, 1153.) Critically, “[a] plaintiff must also show that the defendant’s conduct was independently unlawful, that is, proscribed by some constitutional, statutory, regulatory, common law, or other determinable legal standard.” (Winchester Mystery House, LLC v. Global Asylum, Inc. (2012) 210 Cal.App.4th 579, 596.) Stated alternatively, the plaintiff must plead that the defendant’s interference was wrongful “by some measure beyond the fact of the interference itself.” (Della Penna v. Toyota Motor Sales, U.S.A. (1995) 11 Cal.4th 376, 392-393.) Cross-Defendants assert that Cross-Complainants have failed to plead independently wrongful conduct on their part.

Cross-Defendants’ assertion is well taken as it is not clear from the allegations of the Cross-Complaint how their alleged interference with Cross-Complainants’ relationships with the various prospective subtenants was independently unlawful. However, Cross-Defendants’ suggest, and Cross-Complainants confirm in their opposition, that it is Cross-Defendants’ refusal to consent to the proposed assignment of the Lease that was the purportedly wrongful conduct. As Cross-Defendants maintain, there are several problems with this theory. First, if it is Cross-Complainants’ contention that Cross-Defendants’ refusal violated the Lease, such conduct would merely be a breach of contract and therefore insufficient to support the “wrongful” component of the claim. (See Korea Supply Co., supra, 29 Cal.4th at 1158-1159 [in order to qualify as “independently wrongful,” act must be based on “some constitutional, statutory, regulatory, common law or other determinable legal standard”.)

Second, Section 12.1(f) of the Lease provides, in pertinent part, that the Lessor “may reasonably withhold consent to a proposed assignment or subletting if Lessee is in Default at the time consent is requested.” (Complaint, ¶ 4, Exhibit B.) As per the documents which the Court has taken judicial notice of, Cross-Defendants obtained a default judgment against Celebuddy in the UD Action. This judgment has a collateral estoppel effect of establishing that Cross-Defendants were in default of the Lease by failing to pay rent due through November 2016. (See Martin v. General Finance Co. (1966) 239 Cal.App.2d 438 [stating that a default judgment may be as conclusive as if judgment had been rendered after trial, and because it is res judicata as to all issues pleaded in the complaint, the defendant is estopped from denying any of the allegations in the complaint in a subsequent action]; see also Needelman v. DeWolf Realty Co., Inc. (2015) 239 Cal.App.4th 750, 759 [judgment in unlawful detainer has res judicata on issues necessary litigated in order to determine right of possession].) Consequently, Cross-Defendants were not obligated to consent to any proposed assignment of the Lease by Cross-Complainants.

Given the foregoing, as well as Cross-Complainants’ failure to plead interfering conduct by Cross-Defendants that was wrongful “by some measure beyond the fact of the interference itself,” Cross-Defendants’ motion for judgment on the pleadings as to the fifth cause of action on the ground of failure to state facts sufficient to constitute a cause of action is GRANTED WITH 10 DAYS’ LEAVE TO AMEND.

The next claim is for negligent interference with prospective economic advantage and is predicated on allegations that Cross-Defendants acted negligently in relation to Cross-Complainants’ efforts to communicate with prospective subtenants by demanding payments and other things outside the terms of the Lease, and unreasonably withholding consent to a sublease. This tort is established where a plaintiff demonstrates that “(1) an economic relationship existed between the plaintiff and a third party which contained a reasonably probable future economic benefit or advantage to plaintiff; (2) the defendant knew of the existence of the relationship and was aware or should have been aware that if it did not act with due care its actions would interfere with this relationship and cause plaintiff to lose in whole or in part the probable future economic benefit or advantage of the relationship; (3) the defendant was negligent; and (4) such negligence caused damage to plaintiff in that the relationship was actually interfered with or disrupted and plaintiff lost in whole or in part the economic benefits or advantage reasonably expected from the relationship.” (North American Chemical Co. v. Superior Court (1997) 59 Cal.App.4th 764, 786.) Cross-Defendants persuasively contend that no claim has been stated for the same reason as the preceding claim, i.e., that Cross-Complainants have failed to plead that their alleged interference was wrongful independent of the interference itself. Cross-Defendants suggest that they cannot allege such independently wrongful conduct given Cross-Complainants’ own default, which expressly permitted Cross-Defendants to refuse to consent to assignment of the Lease. Given Cross-Complainants’ failure to plead such conduct, Cross-Defendants’ motion for judgment on the pleadings as to the sixth cause of action on the ground of failure to state facts sufficient to constitute a cause of action is GRANTED WITH 10 DAYS’ LEAVE TO AMEND.

The next three causes of action are all contractually based claims (breach of implied covenant of good faith and fair dealing, breach of contract and tortious interference with a contract). Cross-Defendants assert that Cross-Complainants cannot maintain any of these causes of action given the fact that they were in default of the Lease. Indeed, a necessary element of each of the first two of these contractually based claims is that Cross-Defendants’ fully performed under the subject agreement, the Lease, or had an excuse for nonperformance. (See CACI No. 325 [elements of claim for breach of implied covenant]; Richman v. Hartley (2014) 224 Cal.App.4th 1182, 1186 [elements of breach of contract].) As it has been conclusively established that Cross-Complainants were in default of the Lease, they cannot plead that they fully performed and thus cannot state claims for breach of the implied covenant and breach of contract. Consequently, Cross-Defendants’ motion for judgment on the pleadings as to the seventh and eighth causes of action on the ground of failure to state facts sufficient to constitute a cause of action is GRANTED WITHOUT LEAVE TO AMEND.

As for the ninth cause of action for tortious interference with a contract, as Cross-Defendants’ maintain, a critical element of the claim is the existence of a valid contract between the plaintiff and a third party that was intentionally interfered with by the defendant. (Reeves v. Hanlon (2004) 33 Cal.4th 1140, 1148.) Problematically, in the preceding claims, Cross-Complainants repeatedly allege that they only had a prospective economic relationship with subtenants, and not a binding agreement. While a party is permitted to plead inconsistently or in the alternative, affirmative allegations of inconsistent facts are not permitted. (See Manti v. Gunari (1970) 5 Cal.App.3d 442, 229 [explaining that “a pleader cannot blow hot and cold as to the facts positively stated”]. An enforceable contract between Cross-Complainants and a subtenant either existed or it did not- both cannot be true. Because the Lease prohibited assignment of the Lease by Complainant without the Lessor’s prior written consent (see Lease at § 12(a)) and Cross-Defendants were permitted to withhold consent because Cross-Complainants were in default, Cross-Complainants cannot plead the existence of an enforceable agreement with a third party. Consequently, they cannot state a necessary element of this claim, and therefore Cross-Defendants’ motion for judgment on the pleadings as to the ninth cause of action on the ground of failure to state facts sufficient to constitute a cause of action is GRANTED WITHOUT LEAVE TO AMEND.

The final cause of action asserted in the Cross-Complaint is for declaratory relief, with Cross-Complainants requesting a declaration from the Court that the Lease has been frustrated and/or impossible to perform under the doctrine of frustration of purpose and impossibility because of the City’s zoning ordinance and Cross-Defendants’ alleged wrongful withholding of their consent of assignment of the Lease. (Cross-Complaint, ¶ 88.) Cross-Complainants allege that they were “disqualified from acting under the ordinance for the specific performance for which the Premises were leased.” (Id.)

In demurring to this claim, Cross-Defendants persuasively argue that it is barred as a matter of law because the doctrine of frustration of purpose and impossibility is not applicable because the event at issue (issuance of the permit by the City) was foreseeable and controllable by Cross-Complainants.

The common law defense of frustration of purpose arises from the occurrence of an event causing a failure of the consideration for the contract or a practically total destruction of the expected value of the performance. (Autry v. Republic Productions, Inc. (1947) 30 Cal.2d 144, 148.) To prevent the defense from interfering with the need for certainty, the defense is limited to cases of extreme hardship. (Lloyd v. Murphy (1944) 25 Cal.2d 48, 54.) Laws or other governmental acts that make performance unprofitable or more difficult or expensive do not excuse the duty to perform a contractual obligation. (Id. at 55.) The defense is also not available if the risk of the frustrating event was not reasonably foreseeable or controllable by the promisor. (Id.)

Here, the Court is in agreement with Cross-Defendants that the event that purportedly frustrated the Lease- their inability to obtain the necessary approval from the City- was foreseeable and controllable by Cross-Complainants. Cross-Complainants were unable to use the Premises as intended because of their own failure to complete the construction to obtain a permit, or in the alternative to negotiate a more favorable lease which provided remedies for such an occurrence, not because the use itself became illegal. Consequently, Cross-Defendants’ motion for judgment on the pleadings as to the tenth cause of action on the ground of failure to state facts sufficient to constitute a cause of action is GRANTED WITH 10 DAYS’ LEAVE TO AMEND.