Case Number: BC663041 Hearing Date: July 24, 2018 Dept: 37

CASE NAME: County of Los Angeles v. Vasquez & Company, LLP et al.

CASE NO.: BC663041

HEARING DATE: 7/24/18

DEPARTMENT: 37

CALENDAR NO.: 11

FILING DATE: 5/26/17

FSC/TRIAL DATE: 5/13/19 (FSC), 5/21/19 (Trial)

NOTICE: OK

SUBJECT: Demurrer to the Second Amended Complaint and Motion to Strike [1]

MOVING PARTY: Defendant Vasquez & Company, LLP

OPPOSING PARTY: Plaintiff County of Los Angeles
COURT’S TENTATIVE RULING

The court SUSTAINS Defendant Vasquez & Company, LLP’s demurrer to the SAC with 20 days leave to amend. The motion to strike is MOOT. Counsel for Defendant to give notice.
STATEMENT OF THE CASE

This case arises from allegations that non-party Chicana Service Action Center (“CSAC”), a 501(c)(3) non-profit corporation, fraudulently billed Plaintiff County of Los Angeles (“County”) in connection with CSAC’s contracts to provide various public and social services to eligible County clients. Defendant Vasquez & Company, LLP (“Vasquez”) is alleged to have been an “independent auditor” retained to audit CSAC’s annual financial statements and issue opinions as to CSAC’s financial position and compliance with the requirements for federal award recipients.

Plaintiff County allegedly commenced a criminal investigation of CSAC in 2011 and found that CSAC executives fraudulently billed the County and embezzled approximately $9 million during fiscal years 2007-2008 through 2011-2012. The County’s district attorney’s office allegedly filed criminal charges against CSAC officers on June 15, 2015 and May 9, 2017; the officers allegedly pled guilty to embezzling and misappropriating public funds on August 15, 2017.

In 2015, the County’s Office of County Investigations (“OCI”) allegedly commenced an inquiry into Vasquez. Defendant’s managing partner, Gilbert Vasquez, allegedly participated in a voluntary interview on August 19, 2015 and September 22, 2015. Plaintiff alleges that the County discovered facts during these interviews that led it to suspect that Vasquez’s independence from CASC was compromised and that Vasques had issued audit reports that misrepresented CSAC’s financial activities, including by failing to address serious issues and defalcations of CSAC and/or failing to alert County of Vasquez’s suspicions of CSAC’s allegedly fraudulent and/or criminal conduct.

In the Second Amended Complaint (“SAC”), Plaintiff alleges two causes of action for: (1) fraud and (2) negligent misrepresentation.

Defendant Vasquez now demurs to the Complaint on grounds that Plaintiff’s claims are barred by the statute of limitations and that the first cause of action fails to state facts sufficient to constitute a cause of action for fraud and deceit. Vasquez additionally moves to strike the allegations related to the request for punitive damages from the SAC. Plaintiff opposes the demurrer and motion to strike.
DEMURRER
I. Legal Standard

A demurrer is an objection to a pleading, the grounds for which are apparent from either the face of the complaint or a matter of which the court may take judicial notice. (Code Civ. Proc., § 430.30, subd. (a); see also Blank v. Kirwan (1985) 39 Cal.3d 311, 318.) The purpose of a demurrer is to challenge the sufficiency of a pleading “by raising questions of law.” (Postley v. Harvey (1984) 153 Cal.App.3d 280, 286.) The court “treat[s] the demurrer as admitting all material facts properly pleaded, but not contentions, deductions or conclusions of fact or law….” (Berkley v. Dowds (2007) 152 Cal.App.4th 518, 525 (Berkley).) “In the construction of a pleading, for the purpose of determining its effect, its allegations must be liberally construed, with a view to substantial justice between the parties.” (Code Civ. Proc., § 452; see also Stevens v. Superior Court (1999) 75 Cal.App.4th 594, 601.) “When a court evaluates a complaint, the plaintiff is entitled to reasonable inferences from the facts pled.” (Duval v. Board of Trustees (2001) 93 Cal.App.4th 902, 906.)

The general rule is that the plaintiff need only allege ultimate facts, not evidentiary facts. (Doe v. City of Los Angeles (2007) 42 Cal.4th 531, 550 (Doe).) “All that is required of a plaintiff, as a matter of pleading, even as against a special demurrer, is that his complaint set forth the essential facts of the case with reasonable precision and with sufficient particularity to acquaint the defendant with the nature, source and extent of his cause of action.” (Rannard v. Lockheed Aircraft Corp. (1945) 26 Cal.2d 149, 156-157.) “Generally it is an abuse of discretion to sustain a demurrer without leave to amend if there is any reasonable possibility that the defect can be cured by amendment.” (Goodman v. Kennedy (1976) 18 Cal.3d 335, 349.)
II. Analysis
A. Statute of Limitations

For a statute of limitations to bar a claim on demurrer, “the defect must clearly and affirmatively appear on the face of the complaint; it is not enough that the complaint shows that the action may be barred.” (Committee for Green Foothills v. Santa Clara County Bd. of Supervisors (2010) 48 Cal.4th 32, 42, internal quotation marks omitted.) In general, a statute of limitations begins to run “when the cause of action is complete with all of its elements,” namely, wrongdoing, causation, and resulting harm. (Norgart v. Upjohn Co. (1999) 21 Cal.4th 383, 397 (Norgart).) A cause of action for fraudulent misrepresentation is subject to a three-year statute of limitations. (Code Civ. Proc., § 338, subd. (d).) A cause of action for negligence is subject to a two-year statute of limitations. (Code Civ. Proc., § 335.1.)

“In order to rely on the discovery rule for delayed accrual of a cause of action, ‘[a] plaintiff whose complaint shows on its face that his claim would be barred without the benefit of the discovery rule must specifically plead facts to show (1) the time and manner of discovery and (2) the inability to have made earlier discovery despite reasonable diligence.’ [Citation.] In assessing the sufficiency of the allegations of delayed discovery, the court places the burden on the plaintiff to ‘show diligence’; ‘conclusory allegations will not withstand demurrer.’ [Citation.]” (Fox v. Ethicon Endo-Surgery, Inc. (2005) 35 Cal.4th 797, 808 (Fox); Nguyen v. W. Digital Corp. (2014) 229 Cal.App.4th 1522, 1553.)

According to the SAC, Plaintiff’s OCI and District Attorney’s office commenced a criminal investigation of CSAC in 2011. (SAC ¶ 7.) The County’s District Attorney’s Office filed criminal charges against three officers of CSAC on June 15, 2015 based on allegations of fraudulent billing during the fiscal years in which Defendant Vasquez was CSAC’s auditor; the criminal complaint contained 61 counts. (SAC ¶ 7.) The County’s criminal claims against CSAC’s officers appear to have included allegations of wrongdoing of which Defendant allegedly knew but failed to identify to Plaintiff during the relevant fiscal years. (See SAC ¶ 9.) The SAC alleges that Plaintiff was harmed by Defendant’s allegedly wrongful conduct in its audit reports, when they were issued, and Plaintiff’s claims are barred by the applicable statutes of limitations absent tolling. (See Norgart, supra, 21 Cal.4th at p. 397.)

Defendant contends that Plaintiff’s causes of action accrued no later than on or about June 30, 2011, the date on which Vasquez issued its audit report for fiscal year 2010-2011, which was the last audit report on which the County could have relied in deciding to continue its contract with CSAC for fiscal year 2011-2012. (Dem. 4.) Defendant further argues that the County knew sufficient facts concerning CSAC’s alleged financial improprieties by 2011 to begin a criminal investigation and that it knew that Vasquez was its auditor. (Ibid.) Defendant thus concludes that the County knew facts concerning the alleged fraud sufficient to place it on inquiry notice of its claims against Vasquez and to begin the running of the statutes of limitations as of 2011. (Ibid.)

However, the fact that Plaintiff suspected or had reason to suspect that CSAC had committed wrongdoing does not necessarily establish that Plaintiff had reason to suspect that Vasquez had made misrepresentations in its audit reports, as is alleged in the SAC. (See E-Fab, Inc. v. Accountants, Inc. Servs. (2007) 153 Cal.App.4th 1308, 1322 (E-Fab) [recognizing that a plaintiff’s claims against an individual wrongdoer may accrue at a different time from different wrongdoing by a different defendant]; see also Fox, supra, 35 Cal.4th at p. 814 [“[I]f a plaintiff’s reasonable and diligent investigation discloses only one kind of wrongdoing when the injury was actually caused by tortious conduct of a wholly different sort, the discovery rule postpones accrual of the statute of limitations on the newly discovered claim.”].) The fact that Plaintiff began an investigation of CSAC in 2011 is insufficient to establish that Plaintiff had reason to suspect that Defendant Vasquez had committed wrongdoing through its audit reports. (See ibid.)

Plaintiff contends that its claims are not barred by the statute of limitations because it first discovered facts that led it to suspect that Vasquez’s independence from CSAC was compromised through interviews with Defendant’s managing partner Gilbert Vasquez that occurred on August 19, 2015 and September 22, 2015. (SAC ¶ 9.) Plaintiff specifically alleges that it discovered through those interviews that Gilbert Vasquez personally benefitted from improper payments made from public funds, including an all-expenses-paid, weeklong, private cruise with CSAC’s President, its Vice President of Government Affairs, and two other couples. (Id. at ¶ 9(A).) Gilbert Vasquez allegedly also testified that Vasquez sold sporting event tickets to CSAC, and that Defendant knew of additional improprieties including rent payments made for CSAC’s executives, the payment of CSAC’s executives’ credit card expenses, the purchase of expensive automobiles, as well as loans to CSAC employees that were made without written agreements and that went unpaid, all of which were allegedly improperly made using public funds. (Id. at ¶ 9.) According to Plaintiff, Gilbert Vasquez’s statements in his interview led the County to discover that Vasquez had a collusive relationship with CSAC. (Ibid.) These allegations regarding the time and manner of Plaintiff’s discovery of facts of Vasquez’s alleged wrongdoing are specific enough to meet the first prong of the test to plead delayed discovery. (See Fox, supra, 35 Cal.4th at p. 808; see also E-Fab, supra, 153 Cal.App.4th at pp. 1324-1325.)

Defendant next contends that the SAC fails to allege facts regarding Plaintiff’s inability to have made earlier discovery despite reasonable diligence. (Dem. 8.) Plaintiff argues that Defendant offers no legal authority for the proposition that the district attorney should have conducted its investigation of CSAC differently in hopes that he would uncover facts about Defendant, who was not the target of the investigation. (Opp. 14.) That, however, is not the applicable standard to plead delayed discovery. As stated above, a plaintiff must specifically allege facts to show the inability to have made earlier discovery despite reasonable diligence. (Fox, supra, 35 Cal.4th at p. 808.) The SAC, however, has not pled any facts as to this required prong of the test. (See SAC ¶¶ 6-11.) Accordingly, Plaintiff has not met the second prong of the test to plead delayed discovery of its claims against Defendant.

Plaintiff cites cases including E-Fab to argue that the Court of Appeal found a plaintiff had sufficiently pled its inability to have made earlier discovery where the operative complaint alleged that “[the] plaintiff had] no reason to suspect that [the defendant staffing agency] did not screen [the employee] and failed to discover she had prior convictions for theft and welfare fraud, or that her academic credentials were misrepresented, or that she was embezzling money as [the employee] appeared to be a competent and honest employee.” (Opp. 14, quoting E-Fab, supra, 153 Cal.App.4th at p. 1325.) E-Fab is distinguishable, as the complaint in that case alleged the facts stated, whereas here, the SAC does not.

Plaintiff argues that it could not have been acting unreasonably when it did not interview Gilbert Vasquez until August 2015 because there was no reason for Plaintiff to investigate Defendant while it was investigating CSAC’s embezzlement. (Opp. 15.) Plaintiff further argues that even if the investigation of CSAC had yielded some question of the care in which Defendant had prepared the audits earlier, this would not necessarily have caused Plaintiff to be concerned with Defendant’s fraud or negligent misrepresentation. (Ibid.) Plaintiff, however, did not state these assertions or allege facts sufficient to demonstrate assertions in the SAC. A demurrer is an objection to a pleading, the grounds for which are apparent from either the face of the complaint or a matter of which the court may take judicial notice. (Code Civ. Proc., § 430.30, subd. (a).) Plaintiff’s arguments in its opposition brief are insufficient to demonstrate that the SAC alleges sufficient facts to pled delayed discovery.

For these reasons, the court SUSTAINS the demurrer to the first and second causes of action of the SAC with 20 days leave to amend to allow Plaintiff the opportunity to plead sufficient facts regarding its inability to have reasonably discovered Defendant’s wrongdoing prior to the August 2015 interview of Gilbert Vasquez. Having sustained the demurrer on this basis, the court need not address the parties’ remaining arguments. The motion to strike is MOOT.

[1] Defendant submits the Declaration of Carey B. Moorehead (“Moorehead Declaration”) in support of the subject demurrer and motion to strike. Moorehead attests that the parties met and conferred by telephone on September 17, 2018 regarding the deficiencies in the SAC. (Moorehead Decl. ¶ 5.) According to Moorehead, Plaintiff’s counsel was unwilling to amend the SAC to address the identified deficiencies. (Ibid.) This declaration is sufficient to meet the statutory requirements. (Code Civ. Proc., §§ 430.41, subd. (a); 435.5, subd. (a).)