Case Number: KC065753 Hearing Date: May 07, 2014 Dept: J

Re: Boahua Zheng v. Rex Spirits, Inc. (KC065753)

(1) DEMURRER TO SECOND AMENDED CROSS-COMPLAINT OF REX SPIRITS, INC.; (2) MOTION TO STRIKE ENTIRE OR PORTIONS OF SECOND AMENDED CROSS-COMPLAINT OF REX SPIRITS, INC.; (3) DEMURRER TO CROSS-COMPLAINT OF SAL ORTIZ; (4) MOTION TO STRIKE CROSS-COMPLAINT OF SAL ORTIZ

Moving Party: (1)-(4) Cross-Defendant Bin Li

Respondents: (1) and (2) Cross-Complainant Rex Spirits, Inc.; (3) and (4) No timely opposition filed, but First Amended Cross-Complaint filed by Sal Ortiz on April 29, 2014

POS: (1) and (2) Moving OK; Opposing OK; Reply OK

The Complaint herein alleges that Plaintiff Zheng and Defendant Rex Spirits, Inc. entered into an agreement wherein Plaintiff would loan $1,000,000 to Defendant to use to develop and establish a liquor distribution business in China, give Plaintiff exclusive marketing rights to the liquor business in China, and Defendant would repay Plaintiff the $1,000,000 loan within one year; and that Defendant breached the agreement by failing to repay $700,000 of the outstanding principal balance. The Complaint, filed on 3/4/13, asserts causes of action for:

1. Breach of Contract
2. Breach of Contract
3. Common Counts

The Second Amended Cross-Complaint of Rex Spirits, Inc. filed on 1/27/14, against Plaintiff, Bin Li and East West Bank, asserts causes of action for:

1. Negligence
2. Breach of Contract
3. Breach of Fiduciary Duty
4. Fraud
5. Conversion

The Trial Setting Conference is set for 5/7/14.

(1) DEMURRER TO SECOND AMENDED CROSS-COMPLAINT OF REX SPIRITS, INC.:

JUDICIAL NOTICE:

The court takes judicial notice of the items requested in Cross-Defendant’s Request for Judicial Notice. (Ev C § 452(d).)

Cross-Defendant Bin Li (“Li”) demurs to the Second Amended Cross-Complaint (“SAX-C”) filed by Cross-Complainant Rex Sprits, Inc. (“Rex Spirits”) on the grounds that the fourth cause of action for fraud fails to state facts sufficient to state a cause of action and is fatally uncertain.

DEMURRER BASED ON UNCERTAINITY:

A demurrer for uncertainty will be sustained only where the complaint is so bad that the defendant cannot reasonably respond; i.e., he or she cannot reasonably determine what issues must be admitted or denied, or what counts or claims are directed against him or her. (Khoury v. Maly’s of Calif., Inc. (1993) 14 Cal.App.4th 612, 616.)

The SAX-C is not so uncertain that Li cannot reasonably determine what issues must be admitted or denied. The demurrer based on uncertainty is overruled.

FOURTH CAUSE OF ACTION FOR FRAUD:

The elements of fraud are: (1) a misrepresentation (false representation, concealment, or nondisclosure); (2) knowledge of falsity (scienter); (3) intent to defraud or induce reliance; (4) justifiable reliance; and (5) damages. (See CC § 1709.) “Fraud actions are subject to strict requirements of particularity in pleading. (Committee on Children’s Television, Inc. v. General Foods Corp. (1983) 35 Cal.3d 197, 216.)

The SAX-C alleges that on or about December 10, 2011, Li arranged a meeting between Sal Ortiz, president of Rex Spirits, and Boahua Zheng, whom Li had described as a potential investor, at Zheng’s home in San Marino (SAX-C ¶ 13); there was no direct communication between Ortiz and Zheng during the meeting (Ibid.); it appeared to Ortiz that Zheng did not speak English as Li acted as a translator during the brief discussion between Ortiz and Zheng (Ibid.); on or about January 1, 2012, Li drafted and presented Ortiz with a loan agreement outlining the terms and conditions of the investment agreement whereby Zheng would loan Rex Spirits $1,000,000 in exchange for an 18% equity share of Rex Spirits (Id. ¶ 14); at that time Li indicated to Ortiz that the terms and conditions of the Loan Agreement were consistent with what Ortiz had requested (Ibid.); specifically, Li explained to Ortiz that Rex Spirits would have one year with to repay the principal with no interest (Ibid.); upon reviewing the Loan Agreement, Ortiz contacted Li and expressed concern regarding certain terms which indicated that Zheng would be able to declare the loan in default if the total principal balance was not repaid within one year (Id. ¶ 15); Li responded that Zheng requested these terms be included in the agreement as a precaution, but that as long as the new product was launched within one year, Zheng would not declare the loan in default even if the principal was not repaid within one year (Ibid.); upon Li’s representations, Ortiz wrote an email to confirm terms of the agreement including granting Zheng the exclusive territory of China, and that the Loan Agreement must include terms allowing Rex Spirits to repay the principal within 2 years at minimum (Ibid.); and Ortiz signed the Loan Agreement in reliance on Li’s representations regarding the meaning of the terms of the agreement with respect to payment term (Id. ¶ 17).

The SAX-C further alleges that Rex Spirits relied on the representations of Li regarding the terms of the loan agreement between Zheng and Rex Spirits, and specifically the fact that Rex Spirits would have more than one year to pay back the loan and that no funds would be withdrawn from Rex Spirits’ account without Sal Ortiz’s express authorization (SAXC ¶ 53); Rex Spirits justifiably relied on these representations based on the fact that Li was the attorney for Rex Spirits and the person who arranged the loan and drafted the Loan Agreement (Id. ¶ 54); at the time the representations were made Cross-Defendants had no reasonable grounds for believing them to be true (Id. ¶ 55); Cross-Defendants made these false representations negligently, and without sufficient regard for the truth or falsity of the matters which were the subject of the representations (Ibid.); the representations were made with the intent to induce Plaintiff to enter into the Loan Agreement and Retainer Agreement (Id. ¶ 56); and that as a result, Rex Spirits has been damaged (Id. ¶ 58).

Li contends that the fourth cause of action fails to state a claim on two grounds: 1) that there is no allegation that Li represented that no funds would be withdrawn from Rex Spirit’s account without Ortiz’ express authorization, and 2) that it is a sham pleading.

The SAX-C alleges at paragraph 52 that “Rex relied on the representations of Li…that no funds would be withdrawn from Rex’s account without Ortiz’ signature and express authorization.” (Para. 52). Thus, there are allegations that Li said those things, and the demurrer on this ground is overruled.

Second, Defendant contends the SAX-C is a sham pleading since Rex Spirits is now alleging that Li intentionally misrepresented facts, whereas the First Amended Cross-Complaint alleged that Li had made the alleged misrepresentations negligently. “Under the sham pleading doctrine, allegations in an original pleading that rendered it vulnerable to demurrer or other attack cannot simply be omitted without explanation…The purpose of the doctrine is to enable the courts to prevent an abuse of process…The doctrine is not intended to prevent honest complainants from correcting erroneous allegations or to prevent the correction of ambiguous facts.” (Hahn v. Mirda (2007) 147 Cal.App.4th 740, 751 (citing Deveny v. Entropin, Inc. (2006) 139 Cal.App.4th 408, 425-426).) The rule against sham pleadings is inapposite to an amended complaint omitting allegations of a prior pleading, or adding inconsistent facts, where they are immaterial to the legal theories, and do not undermine the causes of action. (Berman v. Bromberg (1997) 56 Cal. App. 4th 936, 946-947.)

In this case, paragraph 53 of the SAX-C states that Li knew the representations were false when he made them “based on his relationship and communications with EW [East West Bank and]…with Zheng,” which shows intent, where there was a former allegation of negligence. The prior allegation contained “negligence language” to support the scienter element of a fraud claim, where language of intent should have been pled, constituting an erroneous allegation. Further, new facts have been added to support intent. In addition, Cross-Complainant requests leave to amend to add a cause of action for negligent misrepresentation. The demurrer is overruled. Cross-Complainant’s request for leave to amend is denied.

(2) MOTION TO STRIKE SECOND AMENDED CROSS-COMPLAINT OF REX SPIRITS, INC.:

Li also moves to strike the portions of the SAX-C seeking punitive damages.

The court may strike out any irrelevant, false, or improper matter inserted in any pleading and strike out all or any part of any pleading not drawn or filed in conformity with the laws of this state, a court rule, or an order of the court. (CCP § 436.)

The SAX-C adequately alleges facts demonstrating fraud, as discussed above. Thus, the motion to strike is denied.

Li also moves to strike the SAX-C on the grounds that it was filed more than 10 days after the court granted 10 days leave to amend. However, it does not appear that Li was prejudiced by the delay in that he has had an opportunity to attack the pleading on its merits. The motion to strike is also denied on this ground.

Cross-Defendant Bin Li has 10 days to answer.

(3) AND (4) DEMURRER AND MOTION TO STRIKE AS TO CROSS-COMPLAINT OF SAL ORTIZ:

Cross-Complainant Sal Ortiz filed a First Amended Cross-Complaint on April 29, 2014. Any pleading may be amended once by a party as a matter of course, including after a demurrer is filed and prior to the hearing on the demurrer. (CCP § 472.)

The demurrer and motion to strike are therefore deemed moot.