Case Number: EC060548    Hearing Date: August 22, 2014    Dept: A

Stas Group v Fowler

DEMURRER & MOTION TO STRIKE

Calendar: 8
Case: EC060548
Date: 8/22/14

MP: Cross-Defendant, Estate of Lorena Post and Scott Post
RP: Cross-Complainant, Kymry Fowler and Post Speech Pathology, Inc.

ALLEGATIONS IN FIRST AMENDED CROSS-COMPLAINT:
The Cross-Defendants induced the Cross-Complainant into an agreement to purchase Post Speech Pathology, Inc. with false representations about its financial condition. The Cross-Defendants then inserted additional documents with the Cross-Complainant’s knowledge into the agreement. The Cross-Complainant seeks damages and a declaration regarding the rights and duties of the parties.

CAUSES OF ACTION IN FIRST AMENDED CROSS-COMPLAINT:
1) Fraud
2) Declaratory Judgment
3) Declaratory Relief
4) False Promise
5) Declaratory Relief
6) Negligence
7) Intentional Misrepresentation
8) Intentional Misrepresentation
9) Negligent Misrepresentation
10) Declaratory Relief

RELIEF REQUESTED:
Demurrer to first, second, third, fourth, fifth, seventh, eighth, ninth, and tenth causes of action

DISCUSSION:
This case arises from the Plaintiff’s claim that the Defendants have breached an agreement under which the Plaintiff loaned $400,000 to the Defendants and assisted the Defendants with operating a speech therapy business. The Defendants filed a Cross-Complaint to claim that the Plaintiffs induced them into the agreement with fraudulent statements.

This hearing concerns the Cross-Defendants’ demurrer to each the first, second, third, fourth, fifth, seventh, eighth, ninth, and tenth causes of action in the First Amended Cross-Complaint. The sixth cause of action for negligence is not directed at the moving Cross-Defendants.

1. Demurrers to First, Second, Third, Fourth, and Fifth Causes of Action
The Cross-Defendants argue that these causes of action are defective. The Cross-Complainants admit on page 4 of their opposition that the causes of action are defective. The Cross-Complainants request leave to amend because the error was caused by a drafting error that created ambiguities.
Accordingly, the Court will sustain the demurrers to the first, second, third, fourth, and fifth causes of action with leave to amend.

2. Demurrer to Seventh Cause of Action for Intentional Misrepresentation
This cause of action is directed at the Estate of Lorena Post. The Defendant argues that the cause of action lacks sufficient facts to identify the misrepresentation. The elements of a fraud cause of action are the following:

1) a representation, usually of fact, which is false;
2) knowledge of its falsity;
3) intent to defraud;
4) justifiable reliance upon the misrepresentation; and
5) damage resulting from that justifiable reliance
Stansfield v. Starkey (1990) 220 Cal. App. 3d 59, 72-73.

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.

The Cross-Complainant alleges in paragraph 119 that Lorena Post represented that the company’s revenues were overstated by approximately $980,000. In paragraph 120, the Cross-Complainants then allege that Lorena Post represented revenue figures that were based on false billing practices. In paragraph 122, 123, and 129 the Cross-Complainants allege that the Cross-Complainants relied upon Lorena Post’s false representations.
These facts do not state a claim for fraud because it does not demonstrate that Lorena Post acted with an intent to defraud or that the Cross-Complainant’s reliance on the alleged misrepresentations was justified. The allegation that Lorena Post advised the Cross-Complainant that the company’s revenues were overstated indicates that Lorena Post did not have an intent to defraud; on the contrary, she advised the Cross-Complainant that the company’s revenues were false. Further, this indicates that the Cross-Complainant had notice that the revenue figures for the company were false. It is not reasonable for the Cross-Complainant to rely on revenue figures that the Cross-Complainant knew was false. There are insufficient facts to plead the elements of intent to defraud and justifiable reliance.

Accordingly, the Court will sustain the demurrer to the seventh cause of action. The Cross-Complainants request leave to amend because the cause of action contains a drafting error and the Cross-Complainants did not have any notice that the revenues were overstated by $980,000.

3. Demurrer to Eighth Cause of Action for Intentional Misrepresentation
This cause of action is directed at Scott Post. The Cross-Defendant argues that there are insufficient facts to plead his false representation and that he intended to defraud the Cross-Complainants.
The elements of a fraud cause of action are the following:

1) a representation, usually of fact, which is false;
2) knowledge of its falsity;
3) intent to defraud;
4) justifiable reliance upon the misrepresentation; and
5) damage resulting from that justifiable reliance
Stansfield v. Starkey (1990) 220 Cal. App. 3d 59, 72-73.

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.
The Cross-Complainant alleges in paragraphs 133 and 134 that Scott Post made representations about the billing irregularities on October 2, 2013 and on March 20, 2014. In paragraph 137, the Cross-Complainant alleges that Scott Post intended for the Cross-Complainants to rely on his representations. In paragraph 138, the Cross-Complainant alleges the conclusion that she reasonable relied on the misrepresentations.
There are no particular allegations that support or plead the intent to defraud because the Cross-Complainant does not identify the manner in which the Scott Post intended to induce the Cross-Complainant to act with his alleged misrepresentations. For example, the Cross-Complainant purchased the company in paragraph 31 that she signed the agreement on February 1, 2013. Since Scott Post made the alleged statements after February 1, 2013, he could not have intended to induce her into the contract.
Further, there are no particular allegations that demonstrate that it was reasonable for the Cross-Complainant to rely upon the statements of Scott Post. The Cross-Complainant alleges in paragraph 25 that Lorena Post was the founder and owner of the company. There are no particular allegations that indicate any grounds for the Cross-Complainant to reply on the statements of Scott Post.

Accordingly, the Court will sustain the demurrer to the eighth cause of action.

The Cross-Complainant has the burden of identifying the manner in which she can amend her Cross-Complaint and how that amendment will change the legal effect of her pleading. Goodman v. Kennedy (1976) 18 Cal.3d 335, 349. The Cross-Complainant does not meet this burden because she does not identify any manner by which she can correct the defects in the eighth cause of action. Accordingly, the Court will not grant leave to amend.

4. Demurrer to Ninth Cause of Action for Negligent Misrepresentation
This cause of action is directed at Scott Post. The elements of negligent misrepresentation are the following:

1) a misrepresentation of a past or existing material fact;
2) without reasonable grounds for believing it to be true;
3) with intent to induce another’s reliance on the fact misrepresented;
4) ignorance of the truth and justifiable reliance thereon by the party to whom the misrepresentation was directed; and
5) damages.
B.L.M. v. Sabo & Deitsch (1997) 55 Cal. App. 4th 823, 834.

Negligent misrepresentation is a separate and distinct tort, a species of the tort of deceit. Bily v. Arthur Young & Co. (1992) 3 Cal. 4th 370, 407. Since it is a tort of fraud, facts constituting each element 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. The complaint must allege facts showing how, when, where, to whom, and by what means the representations were tendered. Stansfield v. Starkey (1990) 220 Cal.App.3d 59, 73.

This cause of action contains the same defects identified above in the analysis of the eighth cause of action. The Cross-Complainant alleges in paragraph 142 that Scott Post made representations about the billing irregularities. There are no particular allegations that support or plead the intent to induce reliance because the Cross-Complainant does not identify the manner in which the Scott Post intended to induce the Cross-Complainant to act with his alleged representations. For example, the Cross-Complainant purchased the company in paragraph 31 that she signed the agreement on February 1, 2013. Since Scott Post made the alleged statements after February 1, 2013, he could not have intended to induce her to rely on his representations when she entered into the contract.
Further, there are no particular allegations that demonstrate that it was reasonable for the Cross-Complainant to rely upon the statements of Scott Post. The Cross-Complainant alleges in paragraph 25 that Lorena Post was the founder and owner of the company. There are no particular allegations that indicate any grounds for the Cross-Complainant to reply on the statements of Scott Post.

Accordingly, the Court will sustain the demurrer to the ninth cause of action.

The Cross-Complainant has the burden of identifying the manner in which she can amend her Cross-Complaint and how that amendment will change the legal effect of her pleading. Goodman v. Kennedy (1976) 18 Cal.3d 335, 349. The Cross-Complainant does not meet this burden because she does not identify any manner by which she can correct the defects in the eighth cause of action. Accordingly, the Court will not grant leave to amend.

5. Demurrer to Tenth Cause of Action for Declaratory Judgment
This cause of action is directed at the Estate of Lorena Post and Scott Post. The Cross-Defendants do not identify any basis for finding that the tenth cause of action fails to state sufficient facts to plead a cause of action for declaratory relief because they do not address the requirements for pleading the cause of action.
It is general rule that in an action for declaratory relief the complaint is sufficient if it sets forth facts showing the existence of an actual controversy relating to the legal rights and duties of the respective parties under a contract and requests that the rights and duties be adjudged. City Of Tiburon v. Northwestern Pac. R.R. Co. (1970) 4 Cal. App. 3d 160, 170; see CCP section 1060 (identifying the remedy of declaratory relief). If these requirements are met, the Court must declare the rights of the parties whether or not the facts alleged establish that the plaintiff is entitled to a favorable declaration. Declaratory relief is a broad remedy, and the rule that a complaint is to be liberally construed is particularly applicable to one for declaratory relief.
Further, a demurrer is a procedurally inappropriate method for disposing of a complaint for declaratory relief. Lockheed Martin Corp. v. Continental Ins. Co. (2005) 134 Cal. App. 4th 187, 221. This is based on the reasoning that an order sustaining the demurrer would leave the parties where they were, with no binding determination of their rights, to await an actual breach and ensuing litigation. This would defeat a fundamental purpose of declaratory relief, which is to remove uncertainties as to legal rights and duties before breach and without the risks and delays that it involves. The object of declaratory relief is not necessarily a beneficial judgment; instead, it is a determination, favorable or unfavorable, that enables the plaintiff to act with safety. This reasoning has established the rule that the defendant cannot, on demurrer, attack the merits of the plaintiff’s claim. Accordingly, a complaint is sufficient if it shows an actual controversy; it need not show that plaintiff is in the right.

The Cross-Complainant alleges in paragraph 155 that there is an actual controversy regarding the validity of the stock purchase agreement because the agreement was induced by fraud and false billing records. In paragraph 155, the Cross-Complainant requests a judicial declaration whether the agreement is void or voidable. This is sufficient because it alleges the existence of an actual controversy between the parties and it requests a judicial declaration.

Accordingly, the Court will overrule the demurrer to the tenth cause of action.

RULING:
Sustain demurrers to first, second, third, fourth, fifth, and seventh causes of action with leave to amend.
Sustain demurrers to eighth and ninth causes of action without leave to amend.
Overrule demurrer to tenth cause of action.