Case Name: Shingal, et al. v. Scottline Healthcare Solutions, Inc.
Case No.: 2017-1-CV-307141

This is an action for breach of contract. According to the allegations of the complaint, on October 8, 2016, defendant Scottline Healthcare Solutions, Inc. (“Scottline”) executed a promissory note whereby Scottline promised to pay plaintiff Ajay and Myra Shingal Trust (“Trust”) the principal sum of one million dollars plus 10% simple interest per annum in installments beginning on April 1, 2016 and a note purchase agreement whereby Scottline agreed to sell the promissory note to Trust for one million dollars plus 10% simple interest per annum. (See complaint, ¶¶ 9-10, exhs. A and B.) Trust paid $500,000 to Scottline. (See complaint, ¶ 10.) On November 1, 2016, plaintiff Ajay Shingal (“Ajay”) entered into an employment agreement with Scottline wherein Ajay was offered the position of CEO and was offered the option to purchase 10,000,000 shares of Scottline stock for $.01 per share. (See complaint, ¶¶ 14-15.) The agreement provided that if Scottline terminates Ajay without cause, all unvested options become immediately exercisable for one year. (See complaint, ¶ 16, exh. C.) On November 23, 2016, Scottline terminated Ajay without cause. (See complaint, ¶ 19.) Ajay exercised his option to acquire 10,000,000 shares of Scottline pursuant to the agreement; however, Scottline refuses to return the $500,000 paid and issue shares to Ajay. (See complaint, ¶¶ 20-21.) On March 9, 2017, plaintiffs Ajay and Myra Shingal, as trustees of Trust and Ajay individually (collectively, “Plaintiffs”) filed a complaint against Scottline, Venkat Garikpati (“Garikpati”) and Jyothi Kakumanu (“Kakumanu”) (collectively, “Defendants”), asserting causes of action for:

1) Breach of contract—employment agreement;
2) Breach of implied covenant of good faith and fair dealing—note purchase agreement;
3) Fraudulent inducement—note purchase agreement;
4) Fraudulent concealment—note purchase agreement; and,
5) Unjust enrichment.

Defendants demur to the first cause of action on the ground that the Court lacks subject matter jurisdiction, and to the second through fifth causes of action on the grounds that they fail to state facts sufficient to constitute a cause of action and are uncertain. Defendants also move to strike portions of the prayer from the complaint.

Defendants’ request for judicial notice of the complaint and its attached exhibits is GRANTED. (See Evid. Code § 452, subd. (d).)

Demurrer to the first cause of action

Defendants demur to the first cause of action for breach of contract on the ground that the Court lacks subject matter jurisdiction because the subject agreement contains an arbitration provision. However, “[t]he submission of a dispute to private arbitration does not oust the superior court of jurisdiction.” (Dial 800 v. Fesbinder (2004) 118 Cal.App.4th 32, 44.) “Subject matter jurisdiction is conferred by constitutional or statutory law. The California Supreme Court has defined subject matter jurisdiction thusly: Subject matter jurisdiction … is the power of the court over a cause of action or to act in a particular way. By contrast, the lack of subject matter jurisdiction means the entire absence of power to hear or determine a case; i.e., an absence of authority over the subject matter.” (Cummings v. Stanley (2009) 177 Cal.App.4th 493, 503 [internal quotation marks and citations omitted]; see also Miller-Leigh LLC v. Henson (2007) 152 Cal.App.4th 1143, 1148-1149; see also Harnedy v. Whitty (2003) 110 Cal.App.4th 1333, 1343-1344 (stating that “[t]he principle of ‘subject matter jurisdiction’ relates to the inherent authority of the court involved to deal with the case or matter before it”).) Here, there is no question that the Court has authority to determine a breach of contract claim, and Defendants have not, in the alternative, moved to compel arbitration of the instant matter. The demurrer to the first cause of action is OVERRULED.

Demurrer to the second through fifth causes of action on the ground of uncertainty

Defendants demur to the second through fifth causes of action on the ground that they are uncertain. Defendants do not specify the purportedly uncertain aspects of the complaint. (See Fenton v. Groveland Community Services Dist. (1982) 135 Cal.App.3d 797, 809 (stating that “[g]enerally, the failure to specify the uncertain aspects of a complaint will defeat a demurrer based on the grounds of uncertainty”), disapproved on other grounds in Katzberg v. Regents of Univ. of Cal. (2002) 29 Cal. 4th 300, 328.) Moreover, these causes of action are not so unintelligible such that Defendants cannot respond to them. (See Khoury v. Maly’s of Calif., Inc. (1993) 14 Cal.App.4th 612, 616 (stating that a demurrer should not lie “even where a complaint is in some respects uncertain, because ambiguities can be clarified under modern discovery procedures”); see also Williams v. Beechnut Nutrition Corp. (1986) 185 Cal.App.3d 135, 139, fn. 2 (stating that “where the complaint contains substantive factual allegations sufficiently apprising defendant of the issues it is being asked to meet, a demurrer for uncertainty should be overruled”).) The demurrer to the second through fifth causes of action on the ground that they are uncertain is OVERRULED.

Demurrer to the second cause of action for failure to state facts sufficient to constitute a cause of action

The second cause of action is for breach of the implied covenant of good faith and fair dealing as to the note purchase agreement. The implied covenant of good faith is dependent on a contractual obligation. (See Universal Sales Corp. v. California Press Manufacturing Co. (1979) 20 Cal.2d 751, 771.) However, as Defendants argue, Plaintiffs have not alleged facts supporting full performance. (See Acoustics, Inc. v. Trepte Construction Co. (1971) 14 Cal.App.3d 887, 913 (stating that an element for a breach of contract cause of action is plaintiff’s performance or excuse for nonperformance).) The complaint consistently alleges that Plaintiffs were required to pay $1,000,000, and that Plaintiffs only paid $500,000. The complaint does not explain how this can possibly constitute full performance pursuant to the note purchase agreement. Although the complaint alleges that Plaintiffs “have fully performed all of the conditions on its part to be performed under the terms of the NPA,” this allegation is a conclusion of law that is not admitted on demurrer. (See George v. Automobile Club of Southern California (2011) 201 Cal.App.4th 1112, 1120 (stating that while “[a] demurrer admits all facts properly pleaded, [it does] not [admit] contentions, deductions or conclusions of law or fact”).) Accordingly, the demurrer to the second cause of action on the ground that it fails to state facts sufficient to constitute a cause of action is SUSTAINED with 10 days leave to amend.

Demurrer to the third and fourth causes of action for failure to state facts sufficient to constitute a cause of action

“The elements of a cause of action for fraudulent inducement… are (1) that the [promisor] misrepresented or concealed a material fact…, (2) knowledge of the falsity of the fact or lack of reasonable grounds for believing it to be true, (3) an intent to induce reliance, (4) justifiable reliance by the [promisee], and (5) resulting damages.” (Garamendi v. Golden Eagle Ins. Co. (2005) 128 Cal.App.4th 452, 470, citing Lazar v. Super. Ct. (Rykoff-Sexton, Inc.) (1996) 12 Cal.4th 631, 638.)

Defendants first argue that the third and fourth causes of action fail to state facts sufficient to constitute a cause of action because Plaintiffs fail to allege facts supporting full performance. However, “the plaintiff’s claim does not depend upon whether the defendant’s promise is ultimately enforceable as a contract.” (Lazar, supra, 12 Cal.4th at p.638.) Defendants also argue that because the note purchase agreement states that “Purchaser has been furnished with all materials relating to the business, finances and operations of Scottline and materials relating to the offer and sale of the Note that have been reasonably requested by Purchaser,” Plaintiffs cannot allege causes of action for the failure to provide such information. (See Defs.’ memorandum of points and authorities in support of demurrer (“Defs.’ memo”), pp. 6:21-26, 7:17-22.) However, the complaint alleges that Plaintiffs were, in fact, never provided such information. These causes of action allege that Plaintiffs were fraudulently induced to provide $500,000 to Defendants based on knowingly false misrepresentations or concealments of material facts with an intent to induce Plaintiffs’ reliance on those misrepresentations or concealments upon which were ultimately relied, causing damages. These allegations are sufficient for fraud causes of action. The demurrer to the third and fourth causes of action is OVERRULED.

Demurrer to the fifth cause of action for failure to state facts sufficient to constitute a cause of action

In support of their demurrer to the fifth cause of action, Defendants’ supporting memorandum merely states: “to the extent that the demurrer is granted in whole or part to the second, third or fourth causes of action, the demurrer should also be granted for the fifth cause of action.” (Defs.’ memo, p. 8:12-13.) However, the elements of a cause of action for breach of the implied covenant of good faith and fair dealing are distinct from those for fraud or unjust enrichment. The elements for a claim of unjust enrichment are: “receipt of a benefit and unjust retention of the benefit at the expense of another.” (Lectrodryer v. SeoulBank (2000) 77 Cal.App.4th 723, 726.) Clearly, these facts are alleged. The demurrer to the fifth cause of action is OVERRULED.

Motion to strike paragraphs 2 and 3 from the prayer

Defendants’ motion to strike paragraph 2 from the prayer is DENIED as Plaintiffs allege sufficiently allege facts supporting a cause of action for unjust enrichment.

As to paragraph 3, although Plaintiffs may not obtain punitive damages on the breach of contract causes of action, or the fifth cause of action for unjust enrichment (see Civ. Code § 3294, subd. (a) (stating that punitive damages are only allowed “[i]n an action for the breach of an obligation not arising from contract”)), Plaintiffs may nevertheless obtain punitive damages should they prevail on the fraud claims, and “prove[] by clear and convincing evidence that the defendant[s] ha[ve] been guilty of oppression, fraud, or malice.” (Id.) The Code of Civil Procedure does not require that a plaintiff specify the causes of action to which his or her request for punitive damages apply; rather, a plaintiff is merely required to make “[a] demand for judgment for the relief to which the pleader claims to be entitled.” (Code Civ. Proc. § 425.10; see also Code Civ. Proc. §§ 425.11-425.115.) Here, the prayer does not contain any irrelevant, false, or improper matter and Defendants have not demonstrated that the prayer was not drawn or filed in conformity with the laws of this state, a court rule, or an order of the court. Defendants’ motion to strike paragraph 3 is DENIED.

The Court will prepare the Order.