Superior Court of California

County of Los Angeles

Department 50

california expanded metal products company,

Plaintiffs,

vs.

crystal ibc, llc, et al.,

Defendants.

Case No.:

19STCV14824

Hearing Date:

February 14, 2020

Hearing Time:

8:30 a.m.

[TENTATIVE] ORDER RE:

DEFENDANTS’ MOTION TO STRIKE PUNITIVE DAMAGES FROM PLAINTIFF’S VERIFIED FIRST AMENDED COMPLAINT;

DEFENDANT KYLE SHALLAHAMER’S MOTION TO STRIKE PORTIONS OF PLAINTIFF’S FIRST AMENDED COMPLAINT

Background

On April 29, 2019, Plaintiff California Expanded Metal Products Company (“Plaintiff”) brought this action against Defendants Crystal IBC, LLC, Frank Crystal & Company, Inc., Alliant Insurance Services, Inc. (“Alliant”), and Kyle Shallahamer (“Shallahamer”) (collectively, “Defendants”). The operative First Amended Complaint (“FAC”) was filed on November 7, 2019 and asserts causes of action for breach of contract, fraud, negligent misrepresentation, and professional negligence.

Defendants now move to strike portions of the FAC alleging punitive damages. Shallahamer separately moves to also strike the prayer for attorney fees. Plaintiff opposes.

Discussion

A court may strike any “irrelevant, false, or improper matter inserted in any pleading” or any part of a pleading “not drawn or filed in conformity with the laws of this state, a court rule, or an order of the court.” ((Code Civ. Proc., § 436.) A motion to strike may lie where the facts alleged do not rise to the level of “malice, oppression or fraud” required to support a punitive damages award. ((Turman v. Turning Point of Central California, Inc. (2010) 191 Cal.App.4th 53, 63-64.) “’Malice’ means conduct which is intended by the defendant to cause injury to the plaintiff or despicable conduct which is carried on by the defendant with a willful and conscious disregard of the rights or safety of others” and “’[o]ppression’ means despicable conduct that subjects a person to cruel and unjust hardship in conscious disregard of that person’s rights.” ((Civ. Code, § 3294(c).) “Despicable conduct” has been described as “conduct which is so vile, base, contemptible, miserable, wretched or loathsome that it would be looked down upon and despised by ordinary decent people.” ((Mock v. Michigan Millers Mutual Ins. Co. (1992) 4 Cal.App.4th 306, 331.) “Fraud” means “an intentional misrepresentation, deceit, or concealment of a material fact known to the defendant with the intention on the part of the defendant of thereby depriving a person of property or legal rights or otherwise causing injury.” (Civ. Code,

§ 3294, subd. (c)(3).) “In the context of punitive damages, all that is required is that the fraud must equate to the conduct which gives rise to liability. . . .” ((Nickerson v. Stonebridge Life Ins. Co. (2016) 5 Cal.App.5th 1, 21 [internal quotations and brackets omitted].)

This lawsuit arises out of a self-insurance program called the Riverstone Program which was pitched by Defendants, who were health insurance brokers, to Plaintiff as a viable option for employee health coverage. The punitive damages allegations are asserted in support of the cause of action for fraud against all Defendants. In the FAC, Plaintiff alleges that Shallahamer, Crystal IBC, LLC, and Frank Crystal & Company, Inc. (collectively, the “Crystal Defendants”) were the brokers, and that Alliant was the co-obligor of the Crystal Defendants. (FAC, ¶ 1.)

Defendants argue that the punitive damages allegations must be stricken because the allegations are not specific enough to support a cause of action for fraud. ((See Grieves v. Superior Court (1984) 157 Cal.App.3d 159, 166 [“Not only must there be circumstances of oppression, fraud or malice, but facts must be alleged in the pleading to support such a claim.”].) Here, Plaintiff alleges that the Crystal Defendants made false representations during a May 23, 2017 PowerPoint presentation that the Riverstone Program was a “Private Insurance Exchange” when, in fact, the Riverstone Program did not involve any insurance and that the Riverstone Program had a hospital network and was a PPO and an HMO “look-a-like.” (FAC, ¶ 51; see also FAC, ¶¶ 14-15.) Plaintiff also alleges that representations made in the broker services agreement presented to Plaintiff were false, including representations about premiums not rising for three years. (FAC, ¶ 51.) Plaintiff also alleges that the Crystal Defendants intentionally concealed the fact that the Riverstone Program had insufficient funds to pay claims. (FAC, ¶ 51.) Plaintiff alleges that these representations were made with the intent to induce Plaintiff to participate in the Riverstone Program, and that Plaintiff relied on the Crystal Defendants’ representations and expertise in deciding to participate, to its detriment. (FAC, ¶¶ 53-55.) The Court finds that these allegations are sufficiently particular to support a fraud cause of action.

Nevertheless, Defendants argue that Plaintiff has failed to allege punitive damages liability against the corporate defendants. “An employer shall not be liable for [punitive damages], based upon acts of an employee of the employer, unless the employer . . . authorized or ratified the wrongful conduct for which the damages are awarded.” ((Civ. Code, § 3294, subd. (b).) “With respect to a corporate employer, the . . . authorization [or] ratification . . . must be on the part of an officer, director, or managing agent of the corporation.” ((Civ. Code, § 3294, subd. (b).) Defendants contend that the only employee named by Plaintiff is Shallahamer, and that Plaintiff does not allege that Shallahamer is an officer, director, or managing agent of the corporate defendants. While Defendants acknowledge that Shallahamer is expressly alleged to be a “managing Director of Crystal” (FAC, ¶ 41d), Defendants argue that the substantive allegations relating to Shallahamer show that he was merely a salesperson. Nevertheless, as noted by Plaintiff, the allegation (that must be taken as true) in paragraph 41d of the FAC is that Shallahamer’s position as Director of Employee Benefits, Western Region meant that he “set company policy for the sale of employee benefits insurance products for the Western Region.” This is sufficient for pleading purposes to show that a managing agent authorized or ratified the wrongful conduct. ((See Davis v. Kiewit Pacific Co. (2013) 220 Cal.App.4th 358, 366 [“Managing agents are employees who exercise[] substantial discretionary authority over decisions that ultimately determine corporate policy.” (internal quotations omitted; brackets in original)].)

Shallahamer separately argues that Plaintiff’s prayer for attorney fees is improper as to him in an individual capacity. Shallahamer argues that Plaintiff has not alleged a basis in contract for an award of attorney fees and that there is no basis in law for an award of attorney fees. In opposition, Plaintiff cites the “tort of another” doctrine, which establishes that “attorney fees incurred through instituting or defending an action as a direct result of the tort of another are recoverable damages.” ((Third Eye Blind, Inc. v. Near North Entertainment Ins. Services, LLC (2005) 127 Cal.App.4th 1311, 1324.) In the FAC, Plaintiff alleges that it is entitled to recover the attorney fees it incurred “in dealing with Riverstone’s inadequate funding (including, but not limited to, the Department of Labor investigation and the Riverstone Liquidation).” (FAC, ¶ 49.) However, as noted by Defendants, Plaintiff has not alleged facts showing that it has instituted or had to defend an action from a third party as the result of the conduct alleged here. Plaintiff analogizes its case to Brandt v. Superior Court (1985) 37 Cal.3d 813, where the California Supreme Court allowed an insured to recover attorney fees from his insurer incurred in litigation to obtain the contractual benefits due under the insurance policy where there was a finding of tortious breach of the implied covenant of good faith and fair dealing (or bad faith). ((Id. at p. 817.) But here, there is no allegation of a tortious denial of coverage, and there is no allegation of bad faith. ((See Fuhrman v. California Satellite Systems (1986) 179 Cal.App.3d 408, 426 [construing Brandt “to be limited to [its] factual setting”], disapproved on other grounds in Silberg v. Anderson (1990) 50 Cal.3d 205, 219.) Therefore, the Court finds that Plaintiff has failed to allege a proper basis for recovery of attorney fees against Shallahamer.

Conclusion

Based on the foregoing, Defendants’ motion to strike the punitive damages allegations is denied. Shallahamer’s motion to strike the attorney fees allegations is granted.

Shallahamer is ordered to give notice of this ruling.

DATED: February 14, 2020 ________________________________

Hon. Teresa A. Beaudet

Judge, Los Angeles Superior Court