Case Number: BC437919    Hearing Date: August 08, 2014    Dept: 40

QUINCECE HILLS v. TODD & KATIE, INC.; et.al.
DEMURRER TO THE SECOND AMENDED CROSS-COMPLAINT

Case No: BC437919
Date: August 9, 2014
Tentative Ruling: The demurrer to the second amended Cross-Complaint is SUSTAINED with 10 days leave to amend.

The requests for judicial notice are granted.

On July 20, 2010, Defendant filed a Cross-Complaint. The Second Amended Cross-Complaint, filed on May 5, 2014 alleges causes of action one cause of action for rescission and restitution against Plaintiff and the entire class. The claim alleges that if Hills succeeds on her complaint, she and the entire class would have been unjustly enriched.

On May 15, 2014, Plaintiff/Cross-Defendant filed a demurrer to the First Amended Cross-Complaint. An opposition was filed on July 25, 2014 and a reply was filed on August 1, 2014.

Cross-Defendant challenges the Second Amended Cross-Complaint on two grounds: (1) Cross-Complainant has failed to allege a cognizable theory of recovery based on mistake; (2) the relief sought is unavailable due to the prejudice which would be sustained by the Class; (3) mistake as a basis for rescission is unavailable because the Class is not seeking to enforce a contract against Cross-Complainant; and (4) Cross-Complainant’s attempt to compel the return of tip income is unlawful.

“A prerequisite to any claim for rescission is a contract between the parties.” (Viterbi v. Wasserman (2011) 191 Cal.App.4th 927, 935.) To plead a cause of action for rescission, one must allege (1) the consent of the party rescinding or of any jointly contracting party given or obtained by or through: (a) mistake that was (i) material to the contract; (ii)not the result of neglect of a legal duty; (iii) enforcement of the contract as made would be unconscionable; (iv) other party can be placed in status quo; (v) party seeking relief gives prompt notice of his election to rescind; and (vi) party restores or offers to restore to other party everything of value received under contract; (2) which was exercised by or with the connivance of the party as to whom the party rescinds, or of any other party to the contract jointly interested with such party. (Civil Code §1689.)

Cross-Defendant challenges this cause of action on grounds rescission may be based on a mistake of law or a mistake of fact (Civil Code §§1578, 1577), neither of which Cross-Complainant has alleged. Here, the Cross-Complaint alleges that if Cross-Defendant and the class prevail on their complaint, the oral contract may be rescinded on grounds of mistake. (¶15.) However, it is unclear what the mistake would be as no allegations are presented elaborating on the nature of the purported mistake. (¶¶3-7.) The Cross-Complaint alleges nothing more than the assertion that the parties entered into an oral contract and Cross-Defendant agreed to work as an independent contractor.

Cross-Defendant also argues the allegations fail because the risk that Cross-Defendant and the Class Members would be deemed misclassified was a risk Cross-Complainant was aware of at the time of contracting. “A contracting party bears the risk of a mistake when the agreement so provides or when the party is aware of having only limited knowledge of the facts relating to the mistake but treats this limited knowledge as sufficient.” (Grenall v. United of Omaha Life Ins. Co. (2008) 165 Cal.App.4th 188, 193.) Thus, “[w]here parties are aware at the time the contract is entered into that a doubt exists in regard to a certain matter and contract on that assumption, the risk of the existence of the doubtful matter is assumed as an element of the bargain. [citation omitted] Otherwise stated, the kind of mistake which renders a contract voidable does not include ‘mistakes as to matters which the contracting parties had in mind as possibilities and as to the existence of which they took the risk.’ [citation omitted]” (Guthrie v. Times-Mirror Co. (1975) 51 Cal.App.3d 879, 887.) Cross-Defendant argues that because the Cross-Complaint alleges the dancers explicitly disavowed any relationship beyond that of independent contractor, it is clear Cross-Complainant had this risk in mind when entering into the alleged oral agreement. Cross-Defendant also improperly relies on RJN Exh. 4-7 to support the basis that since 1997 there have been numerous findings that exotic dancers are employees. This determination is a factual issue which cannot be resolved at this stage. Thus, this is not a basis for sustaining the demurrer.

Cross-Defendant also argues the relief sought in the Cross-Complaint is unavailable to Cross-Complainant due to the prejudice the Class members would suffer. This is based on an argument that the Cross-Complaint seeks to recover tips earned up to eight years ago. Cross-Defendant relies on case law supporting the proposition that money paid by mistake cannot be recovered if the party receiving the money altered his position to his detriment. However, the cases cited do not address issues of pleading. The issue argued by Cross-Defendant concerns a factual evaluation which is improper on demurrer. Cross-Defendant also argues that the relief sought is unavailable because the Class is not seeking to enforce the oral agreement.

Cross-Complainant’s opposition is similar to that filed in opposition to the demurrer challenging the First Amended Cross-Complaint. Cross-Complainant argues Civil Code §1689 provides for a rescission of the oral independent contractor agreements between the parties. Cross-Complainant takes the position that Cross-Defendants filing of this action “is inconsistent with her oral independent contractor agreement, which she now claims in unlawful” and assuming she wins, the consideration she received under the contract would also be void. Cross-Complainant argues that while the underlying complaint does not explicitly seek rescission, the intended purpose of the complaint is to effectuate the rescission of those agreements. However, Cross-Complainant does not show how or why that would require Plaintiff to repay the remuneration she received. Cross-Complainant cites no authority for the proposition that an employee would not be permitted to retain the money she collected under the oral agreement simply because she was misclassified. Further, it is well taken that the Cross-Complaint does not assert facts supporting rescission.

Cross-Defendant’s final argument relies on the fact that this case is one seeking to compel the return of tips earned by Class members. Cross-Defendant relies on Labor Code §351 which provides that “[n]o employer or agent shall collect, take, or receive any gratuity or a part thereof that is paid, given to, or left for an employee by a patron, or deduct any amount from wages due an employee on account of a gratuity, or require an employee to credit the amount, or any part thereof, of a gratuity against and as a part of the wages due the employee from the employer. Every gratuity is hereby declared to be the sole property of the employee or employees to whom it was paid, given, or left for …” Section 350(e) defines gratuity as “any tip, gratuity, money, or part thereof that has been paid or given to or left for an employee by a patron of a business over and above the actual amount due the business for services rendered or for goods, food, drink, or articles sold or served to the patron. Any amounts paid directly by a patron to a dancer employed by an employer subject to Industrial Welfare Commission Order No. 5 or 10 shall be deemed a gratuity.”

This issue was argued previously in Cross-Defendant’s demurrer to the First Amended Cross-Complaint. However, it is clear the necessary analysis relies on a factual evaluation. This issue may not be resolved at that stage, as it requires a factual consideration of the nature of the payments.

The demurrer goes on to argue that the Cross-Complaint is in fact seeking a set off from the dancers’ wages, a practice which is illegal. (See Barnhill v. Robert Saunders & Co. (1981) 125 Cal.App.3d 1.) However, the true details of the arrangement between the parties and the issue of whether the remuneration received constitutes gratuity requires an evaluation of the facts, at this stage it cannot definitely be said that the theory asserted by Cross-Complainant is in violation of public policy.