Case Number: EC060026 Hearing Date: May 16, 2014 Dept: A

Sorenson v Realstreamedia

DEMURRER

Calendar: 3
Case No: EC060026
Date: 5/16/14

MP: Cross-Defendant, Michael Sorenson
RP: Cross-Complainants, Realstreamedia, LLC and Linda Billups

ALLEGATIONS IN CROSS-COMPLAINT:
Matthew Smith persuaded the Cross-Complainant, Linda Billups, to invest in and provide services for a documentary film. In addition, they formed the Cross-Complainant, Realstreamedia, LLC. The Cross-Defendant, Michael Sorenson, was the operations manager for the company.
Matthew Smith converted funds from the company for his own uses. The Cross-Defendant is liable for the conversion because he failed to disclose it to Linda Billups and because he aided and abetted Michael Smith.
Michael Smith is not named as a Cross-Defendant.

CAUSES OF ACTION IN CROSS-COMPLAINT:
1) Breach of Fiduciary Duty
2) Aiding and Abetting
3) Fraud (Concealment)

RELIEF REQUESTED:
Demurrers to first, second, and third causes of action.

DISCUSSION:
This hearing concerns the demurrer of the Cross-Defendant to the three causes of action in the Cross-Complaint.

1. Demurrer Based on Defect in Parties
The Cross-Defendant argues that Matthew Smith is a necessary party to this action.
CCP section 430.10(d) authorizes the Court to sustain a demurrer when there is a defect or misjoinder of parties. A demurrer for a defect of parties exists when a third person is necessary or indispensable to the action and must be joined before the action may proceed. For example, when a number of persons have an undetermined interest in the same property, each is an indispensable party to any action by another to obtain a share of the property. Bank of California v. Superior Court (1940) 16 Cal.2d 516, 521. The demurrer will require the plaintiff to amend the complaint and name the necessary or indispensable party.
In deciding whether a person is a necessary party, the Court considers the following:

1) the desirability of joining those persons in whose absence the court would be obliged to grant partial relief to the parties before the court;
2) the importance of protecting the person whose joinder is in question against the practical prejudice to him which may arise through a disposition of the action in his absence; and
3) whether a party may be left, after the adjudication, in a position where a person not joined can subject him to a double or otherwise inconsistent liability.
Countrywide Home Loans, Inc. v. Superior Court (1999) 69 Cal. App. 4th 785, 792-793.

Whenever feasible, the persons materially interested in the subject of an action should be joined as parties so that they may be heard and a complete disposition made. Id. However, the Court should take care to avoid converting a discretionary power or a rule of fairness into an arbitrary and burdensome requirement which may thwart rather than accomplish justice. Id.

A review of the Cross-Complaint reveals that it seeks to hold Michael Sorenson liable for the acts of a third party, Matthew Smith. For example, the first cause of action for breach of fiduciary duty and the third cause of action for fraud by concealment claims that Michael Sorenson breached a fiduciary duty and fraudulently concealed material facts when he did not disclose to the Cross-Complainant that Michael Smith had converted funds from Realstreamedia, LLC.
Further, the second cause of action for aiding and abetting is based on allegations in paragraphs 28 to 30 that the Cross-Defendant, Michael Sorenson, aided and abetted Matthew Smith when Matthew Smith converted funds from Realstreamedia, LLC. This claim seeks to impose liability on Cross-Defendant, Michael Sorenson, for the acts of Matthew Smith under the legal doctrine of conspiracy. Under California law, conspiracy is not a cause of action, but a legal doctrine that imposes liability on persons who, although not actually committing a tort themselves, share with the immediate tortfeasors a common plan or design in its perpetration. Wyatt v. Union Mortgage Co. (1979) 24 Cal.3d 773, 784.
In order for the Cross-Complainant to establish that Cross-Defendant, Michael Sorenson, is liable, the Cross-Complainant must establish that the Cross-Defendant entered formed a conspiracy with Matthew Smith and that Matthew Smith then converted the funds. It is desirable to join Matthew Smith to the Cross-Complaint because, in his absence, the Court would only grant partial relief, i.e., the judgment would apply only to Michael Sorensen and not to the person who committed the conversion, Matthew Smith. Further, Matthew Smith could suffer prejudice if he is not joined because he could not defend himself from the claim that he engaged in the tort of conversion. Finally, there is the danger of inconsistent liability. For example, the Cross-Complainant might establish that Cross-Defendant, Michael Sorensen, is liable for conspiring with Matthew Smith for the tort of conversion, but Michael Smith would not be liable under the judgment.
Finally, in the interest of fairness, Matthew Smith should be a party to the Cross-Complaint because he is alleged to have engaged in the tort of conversion. It is inequitable and thwarts justice if the Court were to enter a judgment against Michael Sorenson for conspiracy, but not against Matthew Smith because Matthew Smith is alleged to have been the person who personally engaged in the conversion, i.e., Mr. Smith took the funds from Realstreamedia, LLC. Matthew Smith is materially interested in the subject of the Cross-Complainant and he should be joined as a party so that a complete disposition made.
Further, the Cross-Complainant’s own papers include an argument that illustrates the inequity of naming Michael Sorenson, but not Matthew Smith. On page 4 of the opposition, at lines 25 to 27, the Cross-Complainant asserts:

“Moreover, RSM and Billups do not want to sue Smith because he is
judgment-proof and they hope to obtain his cooperation in defending
Sorenson’s frivolous claim.”
(underlined in original).

The Cross-Complainant admits that they did not name Matthew Smith as a Cross-Defendant because they hope to gain assistance from Matthew Smith in the litigation against Michael Sorenson. This could result in Matthew Smith admitting to a conspiracy with Michael Sorenson and admitting that he converted funds from Realstreamedia because he knows that he cannot be liable for the tort that he committed to further the conspiracy.

Accordingly, since the Cross-Complainant seeks to hold Michael Sorenson liable for the acts of Matthew Smith in each cause of action, the Cross-Complainant must name Matthew Smith in the Cross-Complainant because he is necessary to the disposition of the Cross-Complaint.

Therefore, the Court will sustain the demurrer to the entire Cross-Complainant on the ground that there is a defect in the parties, i.e., Matthew Smith is a necessary party to resolve the claims in the Cross-Complainant. Since it is reasonably possible to correct this defect by amendment, the Court will grant leave to amend.

2. Demurrer to First Cause of Action for Breach of Fiduciary Duty
There are grounds to sustain a demurrer to the first cause of action for breach of fiduciary duty because it does not plead that the Cross-Defendant had a fiduciary duty to the Cross-Complainant, Linda Billups. To state a cause of action for breach of fiduciary duty, the Cross-Complainants must allege the following:

1) the existence of a fiduciary relationship;
2) its breach; and
3) damage proximately caused by that breach.
Roberts v. Lomanto (2003) 112 Cal. App. 4th 1553, 1562.

In paragraph 22, the Cross-Complainants allege that the Cross-Defendant had a fiduciary duty to Realstreamedia because he was an operations manager. There are no allegations that identify a duty to Cross-Complainant, Linda Billups.
The Cross-Complainants admit that they did not plead that the duty was also to the members of Realstreamedia.

Therefore, the Court will sustain the demurrer to the first cause of action because it lacks sufficient facts to plead that the Cross-Defendant had a fiduciary duty to Linda Billups. Since the Cross-Complainant must amend the pleadings to add Matthew Smith, the Court will grant leave to amend this cause of action.

3. Demurrer to Second Cause of Action for Aiding and Abetting
This cause of action lacks facts indicating that any property of Cross-Complainant, Linda Billups, was converted. A claim for conversion must allege the following elements:

1) Plaintiff had the right of ownership and possession to the property converted;
2) Defendant unlawfully took the property, and
3) the value of the property converted.
Taylor v. S & M Lamp Co. (1961) 190 Cal. App. 2d 700, 705.

Under California law, money can be the subject of an action for conversion if a specific sum capable of identification is involved. Munger v. Moore (1970) 11 Cal. App. 3d 1, 7.

The Cross-Complainants allege in paragraphs 27 and 28 that Realstreamedia, LLC, was entitled to possession of funds and that Matthew Smith converted these funds. There are no allegations that identify the specific sum capable of identification. This is insufficient to plead a claim for conversion of money.
Further, this does not allege that the Cross-Complainant, Linda Billups, had a right to and possession of any property that was converted. Instead, the allegations concern the money that was in the possession of Realstreamedia, LLC. This is insufficient to plead the claim.

Therefore, the Court will sustain the demurrer to the second cause of action because it lacks sufficient facts. Since the Cross-Complainant must amend the pleadings to add Matthew Smith, the Court will grant leave to amend this cause of action.

4. Demurrer to Third Cause of Action for Fraud by Concealment
There are grounds to sustain a demurrer to the third cause of action because it does not plead the particular facts needed to plead a fraud by concealment claim. The elements of a cause of action for fraudulent concealment are the following:

1) the defendant must have concealed or suppressed a material fact,
2) the defendant must have been under a duty to disclose the fact to the plaintiff,
3) the defendant must have intentionally concealed or suppressed the fact with the intent to defraud the plaintiff,
4) the plaintiff must have been unaware of the fact and would not have acted as he did if he had known of the concealed or suppressed fact, and
5) as a result of the concealment or suppression of the fact, the plaintiff must have sustained damage.
Lovejoy v. AT&T Corp. (2004) 119 Cal. App. 4th 151, 157-158.

Facts constituting each element of fraud must be alleged with particularity; the claim cannot be saved by referring to the policy favoring liberal construction of pleadings. Committee on Children’s Television, Inc. v. General Foods Corp. (1983) 35 Cal.3d 197, 216.

a. Lack of Particular Allegations Regarding a Material Fact
The Cross-Complainants allege in paragraph 34 that the Cross-Defendant had knowledge of Matthew Smith’s misconduct. This is alleged on information and belief. This is insufficient because there are no particular allegations demonstrating the manner by which the Cross-Defendant knew of Matthew Smith’s misconduct, i.e., that the Cross-Defendant knew of a material fact.

b. Lack of Particular Allegations Regarding a Duty to Disclose
Further, in paragraph 35, the Cross-Complainants allege that the Cross-Defendant had a duty to disclose these facts to Linda Billups because he was an operations manager for Realstreamedia, LLC. This does not identify any duty to disclose the information to Linda Billups. Instead, the allegations plead a duty to disclose information to Realstreamedia, LLC, because the Cross-Defendant was an operations manager. This is insufficient to plead that the Cross-Defendant had a duty to disclose the alleged material fact.

c. Lack of Particular Allegations Regarding Intent to Defraud
In paragraphs 36 to 38, the Cross-Complainants attempt to plead that the Cross-Defendant had an intent to defraud because he was attempting to position himself to file a lawsuit for sexual harassment, “upon information and belief” he would profit from Matthew Smith’s conversion of funds, and he maintained a company ledger in a locked area. These lack the particularity needed to plead fraudulent intent.
It is obscure how concealing Smith’s conversion of funds is related to the Cross-Defendant’s lawsuit for sexual harassment. There are insufficient particular facts to explain how the Cross-Defendant’s intent to file a lawsuit for sexual harassment indicates that he had a fraudulent intent when he concealed information about Smith converting funds.
Further, there are no particular facts demonstrating that the Cross-Defendant would profit from Matthew Smith’s act of converting funds.
Finally, the act of maintaining a company ledger in a locked area does not demonstrate fraudulent intent. Instead, it merely indicates that the Cross-Defendant kept the company ledger secure.
Accordingly, there are insufficient particular facts to plead the element of fraudulent intent.

d. Lack of Particular Allegations Regarding Cross-Complainant’s Acts
In paragraph 39, the Cross-Complainant alleges that she only discovered the material facts too late to save the company and that she was required to shut down Realstreamedia. There are no particular allegations that identify the manner in which the Cross-Complainant would have acted if she had been told that Matthew Smith had converted funds. For example, how would the Cross-Complainant have preserved Realstreamedia, if the Cross-Defendant had disclosed that Matthew Smith had converted funds.
Accordingly, there are insufficient particular facts to plead the element of fraudulent intent.

e. Lack of Particular Allegations Regarding Damages
The Cross-Complainants allege in paragraph 41 that they suffered damages. There are no particular allegations that identify the amount of damages or that describe the manner in which the Cross-Complainant incurred losses or expenses. This is insufficient to plead the element of damages.

Therefore, the Court will sustain the demurrer to the third cause of action for fraud by concealment. Since the Cross-Complainant must amend the pleadings to add Matthew Smith, the Court will grant leave to amend this cause of action.

Finally, the Cross-Defendant’s demurrer includes some arguments about the punitive damages. The Court advises the Cross-Defendant that a motion to strike is used to attack the remedies sought in a pleading. See Venice Town Council, Inc. v. City of Los Angeles (1996) 47 Cal.App.4th 1547, 1561-1562 (a motion to strike is the procedure to attack an improper remedy).

RULING:
SUSTAIN demurrer to entire Complaint and to the first, second, and third causes of action with leave to amend.