Case Name: Aldo Abronzino v. Jaap Langenberg, et al.
Case No.: 2017-CV-307444

Demurrer to the Second Amended Complaint by Defendants Jaap Langenberg and Luke’s Organic, LLC

Factual and Procedural Background

This is an action for breach of fiduciary duty, conversion, and breach of contract. According to the allegations of the Second Amended Complaint (“SAC”), defendant Luke’s Organic, LLC (“Luke’s Organic” or “Luke’s”) is a limited liability company located in Santa Cruz, California. (SAC at ¶ 3.) Defendant Jaap Langenberg (“Langenberg”) is the CEO, sole manager, and majority member of Luke’s Organic. (Id. at ¶ 5.) At the time defendant Luke’s was formed, Plaintiff Aldo Abronzino (“Plaintiff”) was a 15% owner in the company. (Id. at ¶ 4.) Plaintiff and defendants Langenberg and Luke’s Organic (collectively, “Defendants”) were parties to an Operating Agreement dated July 2, 2014. (Id. at ¶ 33.)

Plaintiff received a notice dated December 8, 2016 (“Notice”) which provided the following: “On November 22, 2016 a majority of members of Luke’s Organic [LLC] approved a transaction whereby Luke’s Organic [LLC] and Jenni’s Kitchen, Inc. (“Jenni’s Kitchen”) each contributed, assigned and transferred to a new company substantially all of their respective assets and liabilities in exchange for cash and equity securities in that company and the assumption by that new company of certain liabilities of Luke’s and Jenni’s Kitchen” (the “Transaction”). (SAC at ¶ 11.) The Notice does not identify the company which bought the assets of Luke’s, the exact consideration received for those assets, nor where Plaintiff’s share of that, “cash and equity securities,” is. (Id. at ¶ 12.)

As the Transaction progressed, Plaintiff learned that his interests had been substantially diluted by equity grants by Defendants. (SAC at ¶ 17.) Also, as the Transaction continued, Plaintiff learned that other entities owned or controlled by defendant Langenberg and his relatives were also included in the Transaction thus diluting the amount to be received by Luke’s and to which Plaintiff might have claim through his ownership in the company. (Id. at ¶ 18.) Plaintiff eventually found that, as part of the Transaction, a new Luke’s Organic, LLC was being formed in Delaware and that one other party to the Transaction was a company called RDO headquartered in Fargo, North Dakota. (Id. at ¶ 27.)

Also, as a result of the Transaction, Jenni’s Kitchen and another member of Luke’s Organic were granted equity interests in a newly formed Delaware entity. (SAC at ¶ 28.) Plaintiff was not offered such equity interests despite the fact that he was also a member of Luke’s Organic. (Ibid.)
According to the SAC, all of the above actions were taken to, among other things, (i) exclude Plaintiff from the proceeds of the Transaction, (ii) enrich the Defendants, and (iii) force Plaintiff to resign from Luke’s and its prospects for future growth and success. (SAC at ¶ 29.) With respect to the Transaction, Plaintiff was never provided with any term sheets, drafts or execution copies of any agreements, any accounting of the amounts being paid by the buyer or how the distributions were calculated. (Id. at ¶ 30.) In addition, Plaintiff alleges that Luke’s was operated prior to the Transaction in a manner designed to enrich defendant Langenberg. (Id. at ¶ 31.)

On June 21, 2017, Plaintiff filed a First Amended Complaint (“FAC”) against Defendants setting forth the following causes of action: (1) breach of fiduciary duty [against Langenberg]; (2) conversion [against Defendants]; and (3) breach of contract [against Defendants].

On July 24, 2017, Defendants filed a demurrer to the second cause of action on the ground that it was barred by the economic loss rule. The Court (Hon. Folan) sustained the demurrer with leave to amend.

On November 2, 2017, Plaintiff filed the operative SAC against Defendants setting forth the following causes of action: (1) breach of fiduciary duty [against Langenberg]; (2) conversion [against Defendants]; and (3) breach of contract [against Defendants].

Demurrer to the SAC

Currently before the Court is Defendants’ demurrer to the second cause of action on the ground that it is barred by the economic loss rule and thus fails to state a claim. (Code Civ. Proc., § 430.10, subd. (e).) Plaintiff filed written opposition. Defendants filed reply papers.

Legal Standard

“In reviewing the sufficiency of a complaint against a general demurer, we are guided by long settled rules. ‘We treat the demurrer as admitting all material facts properly pleaded, but not contentions, deductions or conclusions of fact or law. We also consider matters which may be judicially noticed.’” (Blank v. Kirwan (1985) 39 Cal.3d 311, 318.) “A demurrer tests only the legal sufficiency of the pleading. It admits the truth of all material factual allegations in the complaint; the question of plaintiff’s ability to prove these allegations, or the possible difficulty in making such proof does not concern the reviewing court.” (Committee on Children’s Television, Inc. v. General Foods Corp. (1983) 35 Cal.3d 197, 213–214.)

“The reviewing court gives the complaint a reasonable interpretation, and treats the demurrer as admitting all material facts properly pleaded. The court does not, however, assume the truth of contentions, deductions or conclusions of law. … [I]t is error for a trial court to sustain a demurrer when the plaintiff has stated a cause of action under any possible legal theory. And it is an abuse of discretion to sustain a demurrer without leave to amend if the plaintiff shows there is a reasonable possibility any defect identified by the defendant can be cured by amendment.” (Gregory v. Albertson’s, Inc. (2002) 104 Cal.App.4th 845, 850.)

Second Cause of Action: Conversion

The second cause of action is a claim for conversion. “Conversion is the wrongful exercise of dominion over the property of another. The elements of a conversion are the plaintiff’s ownership or right to possession of the property at the time of the conversion; the defendant’s conversion by a wrongful act or disposition of property rights; and damages. It is not necessary that there be a manual taking of the property; it is only necessary to show an assumption of control or ownership over the property, or that the alleged converter has applied the property to his own use.” (Oakdale Village Group v. Fong (1996) 43 Cal.App.4th 539, 543-544.)

Defendants argue that the conversion claim is subject to demurrer because it is barred by the economic loss rule.

“Generally, purely economic losses are not recoverable in tort.” (NuCal Foods, Inc. v. Quality Egg LLC (E.D. Cal. 2013) 918 F.Supp.2d 1023, 1028 (NuCal); Seely v. White Motor Co. (1965) 63 Cal.2d 9, 16-17.) Instead, “[t]he economic loss rule requires a purchaser to recover in contract for purely economic loss due to disappointed expectations, unless he can demonstrate harm above and beyond a broken contractual promise. [Citation.] Quite simply, the economic loss rule ‘prevent[s] the law of contract and the law of tort from dissolving one into the other.’ [Citation.]” (Robinson Helicopter Co., Inc. v. Dana Corp. (2004) 34 Cal.4th 979, 988 (Robinson).)

“However, a plaintiff can recover in tort after a contract breach in three situations. First, when a product defect causes damage to other property, that is, property other than the product itself. [Citation.] Second, when a defendant breaches a legal duty independent of the contract, irrespective of whether damages are economic. [Citation.] Third, if a special relationship existed between the parties, a party can still recover when the economic loss rule would otherwise apply. [Citation.]” (NuCal, supra, 918 F.Supp.2d at p. 1028 [internal quotation marks omitted].)

Thus, “[t]he economic loss rule, in summary, ‘is that no tort cause of action will lie where the breach of duty is nothing more than a violation of a promise which undermines the expectations of the parties to an agreement.’ [Citation.] This rule serves to prevent every breach of a contract from giving rise to tort liability and the threat of punitive damages.” (JMP Securities LLP v. Altair Nanotechnologies Inc. (N.D. Cal. 2012) 880 F.Supp.2d 1029, 1042.)

As stated above, the Court previously sustained the demurrer to the conversion claim on the ground that it was barred by the economic loss rule. In doing so, the Court (Hon. Folan) concluded that the conversion cause of action was duplicative of the breach of contract claim as both sought damages arising from breach of the Operating Agreement. Plaintiff was thus given leave to amend to state a valid conversion claim.

Here, as Defendants argue, the SAC alleges a conversion claim that also seeks damages based on breach of the Operating Agreement. In particular, Plaintiff alleges that he had a right to possess an interest in Luke’s Organic and his share of the proceeds in the Transaction. (See SAC at ¶ 48.) Defendants allegedly converted Plaintiff’s equity interests and present and future distributions to their own use resulting in actual damages. (Id. at ¶¶ 54, 57.) Similarly, with respect to the breach of contract claim, Plaintiff alleges that Defendants breached the Operating Agreement by (1) operating Luke’s for their own benefit; and (2) failing to distribute Plaintiff’s share of the proceeds from the Transaction resulting in actual damages. (Id. at ¶¶ 64-66.) Thus, based on these allegations, Plaintiff is attempting to enforce a broken contractual promise through his conversion cause of action. Such a claim is subject to demurrer and barred by the economic loss rule.

In opposition, Plaintiff argues that his conversion claim is based on independent tortious conduct, not the Operating Agreement. (See NuCal, supra, 918 F.Supp.2d at p. 1028; Robinson, supra, 34 Cal.4th at p. 991 [the economic loss rule bars a plaintiff’s claim for tortious breach of contract unless the tortious conduct is independent of the breach of contract].) This argument however is underdeveloped as Plaintiff fails to point out any specific allegations in the SAC to support this position. Instead, Plaintiff devotes a lot of his opposition to addressing the breach of fiduciary duty claim which is not the subject of this demurrer. (See OPP at pp. 5-9.) Plaintiff also argues that discovery is ongoing and thus he does not have all of the facts necessary to state a claim for conversion. (Id. at p. 12.) This argument is not persuasive and simply does not change the law that a cause of action must be supported by sufficient facts to withstand a demurrer. Finally, Plaintiff asserts he should be allowed to plead alternative theories of recovery. (Id. at pp. 12-13; see Adams v. Paul (1995) 11 Cal.4th 583, 593 [a party may plead in the alternative and may make inconsistent allegations].) However, as the reply points out, Plaintiff’s theory of liability on the conversion and breach of contract claims are the same, rather than alternative or inconsistent theories. (See Reply at pp. 6-7.) Namely, that Defendants failed to properly distribute interests and proceeds from the Transaction to the Plaintiff. As the conversion cause of action seeks actual damages arising from a breach of contract, the claim is barred by the economic loss rule.

Accordingly, the demurrer to the second cause of action is SUSTAINED for failure to state a claim. As Plaintiff fails to provide any basis for further amendment, leave to amend is DENIED. (See Goodman v. Kennedy (1976) 18 Cal.3d 335, 349 [plaintiff must show in what manner he can amend his complaint and how that amendment will change the legal effect of his pleading].)