Case Number: BC700112 Hearing Date: March 04, 2019 Dept: 24

Defendant Felipe Alcazar Foam Factory Inc.’s demurrer to the Second Amended Complaint by is OVERRULED.

On March 29, 2018, Plaintiff Abad Foam, Inc. (“Plaintiff”) commenced this action against Randhwan Naidu (“Naidu”), Felipe Alcazar (“Alcazar”), Felipe Alcazar, Jr. (“Alcazar Jr”), EBM Foam Corporation (“EDM”) and Foam Factory Inc. (“FF”). On May 14, 2018, FF/Alcazar filed a demurrer to each cause of action to the initial complaint. On June 22, 2018, the Court sustained the demurrer with leave to amend as to the first and third through fifth causes of action and overruled the demurrer as to the remaining causes of action. On July 12, 2018, Plaintiff filed the FAC, which alleged the same nine causes of action as the complaint. On October 22, 2018, the Court again sustained FF and Alcazar’s (collectively “FF/FA”) demurrer to the FAC with leave to amend as to the first through fourth causes of action and overruled as to the fifth. On November 9, 2018, Plaintiff filed the operative Second Amended Complaint (“SAC”), which alleges eleven causes of action for: (1) fraud; (2) misappropriation of trade secrets; (3) breach of duty of loyalty; (4) breach of fiduciary duty; (5) intentional interference with prospective economic advantage; (6) unlawful business practices; (7) conversion; (8) quantum valebant; (9) violation of Penal Code § 496; (10) aiding and abetting breach of duty of loyalty; and (11) aiding and abetting breach of fiduciary duty. Each cause of action was alleged against all defendants, except for the third and fourth alleged solely against Naidu, and the tenth and eleventh alleged solely against FF/FA, EBM and Alcazar Jr.

Alcazar Jr is a shareholder and officer of EBM (collectively, “EBM/FAJ”). Alcazar is a shareholder and officer of FF. Alcazar and Alcazar Jr. are father and son and Plaintiff is informed and believes that they have a very close working relationship and aligned business interests. Plaintiff fabricates and/or manufactures foam products, which results in leftovers from the parts of the foam that is not used. Normally, Plaintiff would collect the leftovers and sell it to other companies to manufacture carpet padding. Plaintiff also sells foam buns to customers on occasion. Naidu worked for Plaintiff for over 7 years in a management capacity.

From August 2013 through April 2016, Naidu created invoices showing sales to EBM in order to have Plaintiff’s shipping department deliver leftovers and foam buns (“Stolen Goods”) to EBM. Naidu would then delete the invoices before they were sent to Plaintiff’s collections department. Upon discovery of the theft, Plaintiff confronted Naidu and he confessed in late 2016. (FAC ¶21.) Naidu also confessed that he was providing EBM/Alcazar Jr with the names of customer to whom Plaintiff would sell the leftovers and foam buns, along with Plaintiff’s customer pricing for the same (“Proprietary Information”). EBM/Alcazar Jr would then approach these same customers and sell them the Stolen Goods for less. (FAC ¶ 21.)

Naidu also confessed that some of the Stolen Goods were delivered to FF/FA, who knew the products were stolen from Plaintiff. FF/FA sold or used the Stolen Goods for their own customers. Naidu confessed that FF/FA were provided with Plaintiff’s Proprietary Information so that they could undercut Plaintiff and did in fact sell the Stolen Goods to Plaintiff’s customers. FF/FA would supply their company trucks and employees to pick p the stolen foam products from Plaintiff’s warehouse after Plaintiff’s business hours in order to evade detection. Naidu facilitated these pickups.

Naidu confessed that he received money from EBM/FAJ to compensate him for his theft of the Stolen Goods and Proprietary Information. Naidu confessed that at one point, Naidu advised EBM/Alcazar Jr that he no longer wanted to participate in the scheme. EBM/FAJ told Naidu that if he withdrew from the scheme they would tell Plaintiff about his theft and he would likely be fired and/or arrested. EBM/FAJ told Naidu that from that point forward, he would be paid less for his continued participation.

Plaintiff has been in the foam business since 1974. As such, Plaintiff is generally aware, and is informed and believes, that Defendants have a close working relationship as Alcazar and Alcazar Jr are father and son who frequently do business together and that they are all conspirators and participants in the scheme to steal products and proprietary information from Plaintiff. The value of the Stolen Goods and lost profits is in excess of $3.6 million subject to proof at trial. Plaintiff is informed and believes that all Defendants conspired to commit the actions and omissions that are the subject of this complaint and, therefore, are all jointly and severally liable for all damages sustained by Plaintiff as a result thereof.

On December 24, 2018, FF/FA filed a demurrer to the first, tenth, and eleventh causes of action on the grounds that the conspiracy allegations are insufficient to hold them liable for Naidu’s conduct. On February 15, 2019, Plaintiff filed an opposition. On February 26, 2019, FF/FA filed a reply.

Legal Standard

A demurrer for sufficiency tests whether the complaint states a cause of action. (Hahn v. Mirda (2007) 147 Cal.App.4th 740, 747.) When considering demurrers, courts read the allegations liberally and in context. In a demurrer proceeding, the defects must be apparent on the face of the pleading or via proper judicial notice. (Donabedian v. Mercury Ins. Co. (2004) 116 Cal.App.4th 968, 994.) A demurrer tests the pleadings alone and not the evidence or other extrinsic matters. Therefore, it lies only where the defects appear on the face of the pleading or are judicially noticed. (CCP §§ 430.30, 430.70.) At the pleading stage, a plaintiff need only allege ultimate facts sufficient to apprise the defendant of the factual basis for the claim against him. (Semole v. Sansoucie (1972) 28 Cal. App. 3d 714, 721.) A “demurrer does not, however, admit contentions, deductions or conclusions of fact or law alleged in the pleading, or the construction of instruments pleaded, or facts impossible in law.” (S. Shore Land Co. v. Petersen (1964) 226 Cal.App.2d 725, 732 [internal citations omitted].)

Meet and Confer

Before filing a demurrer or motion to strike, the moving party must meet and confer in person or by telephone with the party who filed the pleading to attempt to reach an agreement that would resolve the objections to the pleading. (CCP §§ 430.41, 435.5.) Counsel’s declaration satisfies the meet and confer requirement. (Toscano Decl.)

Defendant’s Notice

The Court notes that the moving defendants’ notice of demurrer contains 11 pages of discussion regarding the SAC. The memorandum of points and authorities already has 15 pages. The Court considers this notice discussion in violation of CRC Rule 3.31113(d), and therefore disregards the notice discussion.

Because of this lengthy discussion on the merits of the demurrer in the notice, the notice appears to be improper in form.

First Cause of Action – Fraud and Specificity

FF/FA demurs to the first cause of action on the grounds that the SAC fails to correct the deficiencies of the FAC, and does not provide that FF/FA actually agreed to participate in the conspiracy.

“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. [Citation.] By participation in a civil conspiracy, a coconspirator effectively adopts as his or her own the torts of other coconspirators within the ambit of the conspiracy. [Citation.] In this way, a coconspirator incurs tort liability co-equal with the immediate tortfeasors. Standing alone, a conspiracy does no harm and engenders no tort liability. It must be activated by the commission of an actual tort. A civil conspiracy, however atrocious, does not per se give rise to a cause of action unless a civil wrong has been committed resulting in damage.” (Applied Equipment Corp. v. Litton Saudi Arabia Ltd. (1994) 7 Cal.4th 503, 510-11 [internal quotations marks omitted].)

The underlying tort here is fraud, which requires: “(a) misrepresentation (false representation, concealment, or nondisclosure); (b) knowledge of falsity (or ‘scienter’); (c) intent to defraud, i.e., to induce reliance; (d) justifiable reliance; and, (e) resulting damage.” (Engalla v. Permanente Medical Group, Inc. (1997) 15 Cal.4th 951, 974.) The elements of fraud by concealment are: (1) defendant’s concealment or suppression of a material fact, (2) defendant was under a duty to disclose the fact to the plaintiff, (3) defendant intentionally concealed or suppressed the fact with the intent to defraud plaintiff, (4) plaintiff was unaware of the fact and would not have acted as plaintiff did had plaintiff known of the concealed or suppressed fact, and (5) plaintiff was damaged as a result of the concealment or suppression. (Knutson v. Foster (2018) 25 Cal.App.5th 1075, 1091.) “There are ‘four circumstances in which nondisclosure or concealment may constitute actionable fraud: (1) when the defendant is in a fiduciary relationship with the plaintiff; (2) when the defendant had exclusive knowledge of material facts not known to the plaintiff; (3) when the defendant actively conceals a material fact from the plaintiff; and (4) when the defendant makes partial representations but also suppresses some material facts.’ ” (LiMandri v. Judkins (1997) 52 Cal.App.4th 326, 336.)

Each element of a fraud claim must be plead with specificity and particularity. (Glaski v. Bank of Am., Nat’l Ass’n (2013) 218 Cal. App. 4th 1079, 1090.) “This particularity requirement necessitates pleading facts which ‘show how, when, where, to whom, and by what means the representations were tendered.’ ” (Lazar v. Superior Court, (1996) 12 Cal.4th 631, 645 [emphasis in original].) In the case of a corporate defendant, the plaintiff must also allege the names of the persons who made the allegedly fraudulent representations and their authority to speak on behalf of the corporate defendant. (Id.) When the fraud claim is based on false or incomplete statements, the plaintiff “must set forth at least the substance of those statements.” (Blickman Turkus, LP v. MF Downtown Sunnyvale, LLC (2008) 162 Cal.App.4th 858, 878 [emphasis in original].) In addition, damages must be alleged distinctly and their “causal connection with the reliance on the representations must be shown.” (Service by Medallion v. Clorox Co. (1996) 44 Cal.App.4th 1807, 1818.) “Less specificity is required when ‘it appears from the nature of the allegations that the defendant must necessarily possess full information concerning the facts of the controversy….’ ” (Committee on Children’s Television, Inc. v. General Foods Corp. (1983) 35 Cal.3d 197, 216, superseded by statute on other grounds as stated in Branick v. Downey Savings & Loan Assn. (2006) 39 Cal.4th 235, 242.)

As the Court previously found in the demurrer to the FAC, the SAC alleges enough facts with the requisite specificity to state the underlying tort, i.e. fraud committed by Naidu. As to how, the substance of the representations, and by what means the representations were tendered – the FAC alleges that Naidu created invoices reflecting sales to EBM to have leftovers and foam buns delivered to EBM, as well as to FF/FA (i.e., a misrepresentation of material fact that these products were sold to Defendants) and, thereafter, Naidu deleted these sales invoices before they were sent to Plaintiff’s collections department (i.e., concealment of a material fact that these products were delivered to Defendants). (SAC ¶¶ 20-23.) The SAC further alleges that Naidu provided Plaintiff’s customer list and pricing to Defendants who then used the information to undercut Plaintiff and sell the Stolen Goods to Plaintiff’s customers. (SAC, ¶¶ 19-30, 41.) The FAC alleges these representations were made by Naidu to Plaintiff’s shipping department and Plaintiff’s collections department. The FAC alleges Plaintiff is a local manufacturing business located in Buena Park, California, where Plaintiff has its principal place of business. (SAC ¶ 1.) The FAC alleges the invoices were created and deleted from approximately August 2013 through April 2016. (SAC, ¶ 20.)

The facts alleged also show that Naidu had duty to disclose the false invoices to Plaintiff because the facts establish that Naidu had exclusive knowledge of the false sales invoices, which were unknown to Plaintiff, and that Naidu actively concealed the false sales invoices from the Plaintiff by deleting them. (See LiMandri v. Judkins (1997) 52 Cal.App.4th 326, 336.) The SAC further alleges that Plaintiff detrimentally relied on the invoices in that they caused products to be delivered to parties who had no intention of paying Plaintiff; the invoices and their concealment were intended to mislead Plaintiff, which did reasonably mislead Plaintiff,; Plaintiff was unaware of the false invoices and their concealment until after the fact; and the invoices and concealment were a substantial factor in causing Plaintiff’s damages of $3.6 million. (SAC, ¶¶ 33-38.) Therefore, Plaintiff has alleged each element of the fraud with the requisite specificity.

As previously discussed, it is of no consequence that the FAC does not sufficiently allege facts establishing fraud committed by FF/FA. “As long as two or more persons agree to perform a wrongful act, the law places civil liability for the resulting damages on All of them, regardless of whether they actually commit the tort themselves. [Citation.] ‘The effect of charging . . . conspiratorial conduct is to implicate all . . . who agree to the plan to commit the wrong as well as those who actually carry it out. [Citations.]’ ” (Wyatt v. Union Mortgage Co. (1979) 24 Cal.3d 773, 784.) Therefore, Plaintiff need only plead the commission of a civil wrong that resulted in damages by at least one of the co-conspirators.’

First Cause of Action – Conspiracy Allegations

“To allege a conspiracy, a plaintiff must plead: ‘(1) formation and operation of the conspiracy and (2) damage resulting to plaintiff (3) from a wrongful act done in furtherance of the common design.’ [Citation.]” (Daniels v. Select Portfolio Servicing, Inc. (2016) 246 Cal.App.4th 1150, 1173.) “It is not enough that the [conspirators] knew of an intended wrongful act, they must agree—expressly or tacitly—to achieve it.” (AREI II Cases (2013) 216 Cal.App.4th 1004, 1022.) A conspirator’s agreement to the conspiracy “may be inferred from the character of the acts done, the relations of the parties, the interest of the alleged conspirators, and other circumstances.” (Id. at 1024.) “[A] complaint is sufficient if it apprises the defendant of the ‘character and type of facts and circumstances upon which she was relying to establish the conspiracy.’ [Citation.]” (Id. at 1022.) However, where fraud is the object of the conspiracy, the civil conspiracy claim must be pled with specificity. (Favila v. Katten Muchin Rosenman LLP (2010) 188 Cal.App.4th 189, 211.)

Here, the SAC now alleges facts against FF/FA that establishes that they tacitly agreed to participate with Naidu and/or EBM/FAJ concerning the delivery of the Stolen Goods and the theft of the Propriety Information. The SAC plainly alleges that FF/FA had a mutual understanding that Naidu was to steal from Plaintiff, and thus, at least a tacit agreement between the parties. (SAC ¶¶ 14, 19, 25.) The factual allegations support this conclusion. Naidu, EBM/FAJ would deliver stolen goods to FF/FA. (SAC ¶¶ 21-23.) FF/FA actively participated in the conspiracy by supplying their company trucks and employees to pick the stolen foam products, which they knew to be stolen, from Plaintiff’s warehouse after Plaintiff’s business hours in order to evade detection. (SAC ¶ 21.) Furthermore, Plaintiff alleges evidentiary facts that support the inference that FF/FA agreed to participate in the conspiracy to defraud, as Naidu confessed that they were participants in the conspiracy to steal from Plaintiff. (SAC ¶ 19.) Therefore, the factual allegations, at the very least, support the inference that FF/FA tacitly agreed to achieve the goal of the conspiracy to defraud. This is sufficient for pleading purposes.

FF/FA’s detailed list of missing allegations, e.g. the precise date FF/FA entered into the conspiracy, by what means they entered through it, and other identified deficiencies are unsupported by case law. Plaintiff is not required to plead the level of evidentiary facts FF/FA contends it should. These facts will later be examined through evidence to determine whether FF/FA actually agreed to the conspiracy, or it was just an unwilling participant in Naidu’s and EBM/FAJ’s scheme. However, these evidentiary facts are not required to establish that FF/FA agreed to participate with the conspiracy for pleading purposes. A plaintiff is not expected to know the complete ins-and-outs of a conspiracy to fraud them at the outset, and is not required to allege the precise schema and mechanisms of the conspiracy’s function, including the purported date the conspiracy began. No case law cited by FF/FA supports this level of detail, even if the fraud must be pled with specificity. (See Favila, supra, 188 Cal.App.4th at 211; Lazar, supra, 12 Cal.4th at 645.)

Accordingly, FF/FA’s demurrer to the first cause of action is OVERRULED.

Tenth and Eleventh Causes of Action – Aiding and Abetting

To allege a cause of action on an aiding and abetting theory, a plaintiff must either that “the person (a) knows the other’s conduct constitutes a breach of duty and gives substantial assistance or encouragement to the other to so act or (b) gives substantial assistance to the other in accomplishing a tortious result and the person’s own conduct, separately considered, constitutes a breach of duty to the third person.” (Saunders v. Superior Court (1994) 27 Cal.App.4th 832, 846.)

As discussed above, the SAC adds new allegations regarding FF/FA’s participation in the alleged scheme. Plaintiff alleges that actively participated in the conspiracy by supplying their company trucks and employees to pick the stolen foam products, which they knew to be stolen, from Plaintiff’s warehouse after Plaintiff’s business hours in order to evade detection. (SAC ¶ 21.) Additionally, FF/FA knowingly participated in the breach of the duties alleged, which is supported by the factual allegations. (SAC ¶¶ 19-25; 89-98.) This establishes that FF/FA knew Naidu’s conduct constituted a breach of duty, and nevertheless gave substantial assistance to the other defendants to assist in this breach of their own benefit.

While the Court notes that the SAC now states these as separate causes of action from the underlying tort, the fundamental theories of liability have not shifted between the FAC and SAC. The FAC also included causes of action against FF/FA on the basis of aiding and abetting for the underlying tort, and the Court granted leave to allege further facts regarding that theory. Plaintiff merely re-labeled those theories into their own causes of action. Thus, the superficial changes to the SAC in regards to the titles did not improperly add new causes of action outside of leave.

Accordingly, FF/FA’s demurrer is OVERRULED.

FF/FA to answer in 10 days and ordered to give notice.