Case Name: Isabelle Zablocki v. High Medtech, LLC, et al.
Case No.: 17-CV-309971

Currently before the Court is the demurrer by defendant Barbara Bonar (“Bonar”) to the second amended complaint (“SAC”) of plaintiff Isabelle Zablocki (“Plaintiff”).

Factual and Procedural Background

This is an action for breach of contract and fraud. Defendant High Medtech, LLC (“High Medtech”) began conducting business “as a seller of medical equipment” on August 2, 2004. (SAC, ¶¶ 5 and 14.) Bonar and defendant Brice J.J. Gnahoui (“Gnahoui”) are the owners, operators, and managing members of High Medtech. (Id. at ¶¶ 6-7, 16, 50.)

From October 26, 2006 to October 27, 2010, Plaintiff made “various loans to defendants totaling $495,275.52 ….” (SAC, ¶ 17.) The loans have never been repaid “in spite of defendants’ numerous promises and written agreements to do so. (Ibid.)

Sometime in 2012, High Medtech was suspended by the California Secretary of State. (SAC, ¶ 21.) High Medtech “had not complied with the requirement to file a Statement of Information for 2012 with the California Secretary of State and defendants were aware that [High Medtech] had been suspended.” (Id. at ¶ 52.) Nonetheless, Bonar and Gnahoui “continued to transact business under the name of [High Medtech] ….” (Id. at ¶¶ 5 and 19.)

On March 25, 2013 and November 25, 2014, “Plaintiff entered into written loan agreements with defendants whereby defendants would repay Plaintiff $168,775.52 and $326,500.00 ….” (SAC, ¶ 23.) Gnahoui signed the agreements on behalf of High Medtech, “agreeing to pay [Renaud Zablocki (‘Renaud’)] and [Plaintiff] in full by December 30, 2015 including 4% interest per year.” (Id. at ¶¶ 24 and 51.) “The terms of the agreements also provided for monthly payments commencing April 1, 2013 and November 27, 2014 … in the amount of $1,000 per month.” (Id. at ¶ 26.) Gnahoui “told Plaintiff that he had consulted with his partner [Bonar] and that he had the power to bind the business to the written agreements ….” (Id. at ¶ 25.) In addition, Gnahoui “falsely represented to Plaintiff that [High Medtech] was a company in good standing with the California Secretary of State.” (Id. at ¶ 51.) Bonar and Gnahoui failed to disclose to Plaintiff that High Medtech “had been suspended prior to the execution of the written loan agreements ….” (Id. at ¶¶ 20, 34, 40, 46, 51.)

From February 11, 2013 through September 19, 2014, “Defendants made monthly payments of differing amounts ….” (SAC, ¶ 26.) Thereafter, on December 31, 2015, “[d]efendants breached the agreement … by not paying the balance of the loans then due.” (Id. at ¶ 27.)

In August 2017, Plaintiff first became aware of High Medtech’s suspension by the California Secretary of State. (SAC, ¶ 21.)

Based on the foregoing allegations, Plaintiff filed the operative SAC against High Medtech, Bonar, and Gnahoui, alleging causes of action for: (1) breach of contract; (2) fraud and deceit; (3) intentional/negligent misrepresentation; (4) negligence; (5) alter ego liability; (6) conspiracy; and (7) violation of Business and Professions Code section 17200, et seq. (“UCL”).

On January 29, 2018, Bonar filed the instant demurrer to the SAC. Plaintiff filed papers in opposition to the demurrer on May 29, 2018. Most recently, Bonar filed a reply on June 4, 2018.

Discussion

Bonar demurs to each and every cause of action of the SAC on the ground of failure to allege sufficient facts to constitute a cause of action. (See Code Civ. Proc., § 430.10, subd. (e).)

I. Legal Standard

The function of a demurrer is to test the legal sufficiency of a pleading. (Trs. Of Capital Wholesale Elec. Etc. Fund v. Shearson Lehman Bros. (1990) 221 Cal.App.3d 617, 621.) Consequently, “[a] demurrer reaches only to the contents of the pleading and such matters as may be considered under the doctrine of judicial notice.” (South Shore Land Co. v. Petersen (1964) 226 Cal.App.2d 725, 732, internal citations and quotations omitted; see also Code Civ. Proc., § 430.30, subd. (a).) “It is not the ordinary function of a demurrer to test the truth of the [ ] allegations [in the challenged pleading] or the accuracy with which [the plaintiff] describes the defendant’s conduct. [ ] Thus, [ ] the facts alleged in the pleading are deemed to be true, however improbable they may be.” (Align Technology, Inc. v. Tran (2009) 179 Cal.App.4th 949, 958, internal citations and quotations omitted.) However, while “[a] demurrer admits all facts properly pleaded, [it does] not [admit] contentions, deductions or conclusions of law or fact.” (George v. Automobile Club of Southern California (2011) 201 Cal.App.4th 1112, 1120.)

Furthermore, when evaluating the legal sufficiency of a pleading, courts construe the allegations of the pleading liberally, with a view to substantial justice between the parties, and consider whether the pleading as a whole apprises the adversary of the factual basis of the claim. (See Lim v. The.TV Corp. Internat. (2002) 99 Cal.App.4th 684, 690; see also Scholes v. Lambirth Trucking Co. (2017) 10 Cal.App.5th 590, 598.)

II. First Cause of Action

In the first cause of action for breach of contract, Plaintiff alleges that the defendants breached the written loan agreements executed on March 25, 2013 and November 25, 2014. (SAC, ¶¶ 23-27.) The defendants allegedly breached those agreements on December 31, 2015, by failing to pay “the balance of the loans then due.” (Id. at ¶ 27.)

As Bonar persuasively argues, the first cause of action fails to allege facts sufficient to state a claim for breach of contract because the agreements attached to the SAC demonstrate that Bonar was not a party to those contracts. (See SAC, Exs. A and B; see also Tri-Continent Internat. Corp. v. Paris Sav. & Loan Assn. (1993) 12 Cal.App.4th 1354, 1359 [a claim for breach of contract generally cannot be asserted against one who is not a party to the contract]; Burnett v. Chimney Sweep (2004) 123 Cal.App.4th 1057, 1071 [no cause of action for breach of contract where the plaintiff company was not a party to the lease].) On demurrer, courts admit facts in exhibits attached to the subject complaint, and facts in such exhibits are given precedence over inconsistent allegations in the complaint. (Mead v. Sanwa Bank Cal. (1998) 61 Cal.App.4th 561, 567-568; Barnett v. Fireman’s Fund Ins. Co. (2001) 90 Cal.App.4th 500, 505.) Here, the March 25, 2013 agreement is attached to the SAC and states that it is between Renaud, Plaintiff, and Gnahoui “on behalf of [High Medtech] ….” (SAC, Ex. A.) The November 25, 2014 agreement is also attached to the SAC and states that it is between Plaintiff, Gnahoui, and High Medtech. (Id. at Ex. B.) The agreements do not mention Bonar. Thus, the agreements themselves demonstrate that Bonar was not a party to the contracts that form the basis of the first cause of action.

In opposition, Plaintiff contends that Bonar is a party to the agreements because she was a managing member of High Medtech at the time Gnahoui signed the agreements. However, Plaintiff does not present any legal authority supporting her contention.

Moreover, a manager or member of a limited liability company is not liable for the company’s contractual obligations by virtue of the fact that he or she acted on its behalf absent an agreement to be personally bound or an alter ego relationship. (See Corp. Code, § 17703.04, subds. (a)-(c); see also Kwok v. Transnation Title Ins. Co. (2009) 170 Cal.App.4th 1562, 1570-1571 [managers and members of a limited liability company “have limited liability for the company’s debts and obligations to the same extent enjoyed by corporate shareholders” and have no interest in the company’s property].)

Here, there are no allegations in the SAC showing that Bonar agreed to be personally liable for the obligations and/or debts of High Medtech.

In addition, although the SAC contains alter ego allegations, those allegations are insufficient to invoke the alter ego doctrine. “In California, two conditions must be met before the alter ego doctrine will be invoked.” (Sonora Diamond Corp. v. Super. Ct. (2000) 83 Cal.App.4th 523, 538.) “First, there must be such a unity of interest and ownership between the corporation and its equitable owner that the separate personalities of the corporation and the shareholder do not in reality exist.” (Ibid.) “Second, there must be an inequitable result if the acts in question are treated as those of the corporation alone.” (Ibid.) A plaintiff must allege facts with respect to both conditions. (Vasey v. California Dance Co. (1977) 70 Cal.App.3d 742, 749.) Facts tending to show that a unity of interest exists include: commingling of personal and corporate funds, the unauthorized diversion of corporate funds or assets to non-corporate uses, undercapitalization, failure to maintain minutes or adequate corporate records, and disregard of corporate formalities. (See Sonora Diamond Corp. v. Superior Court (2000) 83 Cal.App.4th 523, 538; Associated Vendors, Inc. v. Oakland Meat Co. (1962) 210 Cal.App.2d 825, 838.) A plaintiff must also allege facts from which it appears that justice cannot otherwise be accomplished unless the corporate entity is disregarded. (Norins Realty Co. v. Consol. Abstract & Title Guar. Co. (1947) 80 Cal.App.2d 879, 883.)

Here, Plaintiff does not allege sufficient facts showing that justice cannot otherwise be accomplished unless the corporate entity is disregarded. Rather, Plaintiff merely alleges in a conclusory manner that she “would suffer irreparable harm and recover nothing due to defendants’ false assertions ….” (SAC, ¶ 56.)

For these reasons, the demurrer to the first cause of action is SUSTAINED with 10 days’ leave to amend.

III. Second Cause of Action

In the second cause of action for fraud and deceit, Plaintiff alleges that “Defendants failed to disclose to [her] that [High Medtech] had been suspended by the California Secretary of State before they entered into written loan agreements with [her], on or about March 25, 2013 and November 25, 2014 ….” (SAC, ¶ 34.) Plaintiff further alleges that “Defendants … aided and abetted, encouraged and rendered substantial assistance in accomplishing the wrongful conduct and their wrongful goals ….” (Id. at ¶ 35.) “[D]efendants [allegedly] acted with an awareness of their primary wrongdoing and realized that their conduct would substantially assist the accomplishment of the wrongful conduct ….” (Ibid.) Plaintiff alleges that as a result of the defendants’ wrongful conduct, she suffered damages. (Id. at ¶ 36.)

As Bonar persuasively argues, Plaintiff does not plead facts showing that she justifiably relied on the alleged nondisclosure to her detriment. (See Lazar v. Super. Ct. (1996) 12 Cal.4th 631, 638 [“The elements of fraud, which give rise to the tort action for deceit, are (a) misrepresentation (false representation, concealment, or nondisclosure); (b) knowledge of falsity (or ‘scienter’); (c) intent to defraud, i.e., to induce reliance; (d) justifiable reliance; and (e) resulting damage.”].) Plaintiff simply alleges that Bonar failed to disclose the fact of High Medtech’s suspension with the intent to defraud and she suffered damages as a result. These allegations are insufficient for pleading purposes.

Accordingly, the demurrer to the second cause of action is SUSTAINED with 10 days’ leave to amend.

IV. Third Cause of Action

In the third cause of action for intentional or negligent misrepresentation, Plaintiff initially alleges that “Defendants directly or indirectly through their agents and employees, made false representations, concealments and nondisclosures to [her]. In making the representations and omissions, and in doing the things alleged above, these defendants … acted without any reasonable grounds for believing the representations were true and intended … to induce [her reliance]. [She] relied upon these false representations, concealments and nondisclosures … in lending defendants money and entering into agreements with defendants …. As a result, [she] sustained damages.” (SAC, ¶ 39.) Plaintiff continues, “[s]pecifically, Defendants failed to disclose to [her] that [High Medtech] had been suspended by the California Secretary of State before they entered into written loan agreements with [her], on or about March 25, 2013 and November 25, 2014 ….” (Id. at ¶ 40.) Plaintiff further alleges that the defendants “aided and abetted, encouraged and rendered substantial assistance in accomplishing the wrongful goals and other wrongdoing complained of herein.” (Id. at ¶ 41.) The defendants allegedly “acted with an awareness of their primary wrongdoing and realized that their conduct would substantially assist the accomplishment of the wrongful conduct ….” (Ibid.)

Bonar argues that to the extent the claim is one for intentional or negligent misrepresentation, the cause of action fails because it does not allege an affirmative misrepresentation of past or existing fact. Bonar contends that instead the claim is based solely on the alleged nondisclosure of High Medtech’s suspended status. Bonar further argues that the claim is not pled with the requisite particularity because there are no allegations describing “what she said or did to participate in a fraud or deceit.”

Here, the third cause of action, as pleaded, is not based on any affirmative misrepresentation by Bonar or the other defendants. Rather, the claim is predicated upon the nondisclosure of High Medtech’s suspended status. (See SAC, ¶ 40.) Thus, to the extent the claim purports to be one for intentional or negligent misrepresentation, it fails because Plaintiff does not allege that any of the defendants made an affirmative misrepresentation as to a past or existing material fact. (See West v. JPMorgan Chase Bank, N.A. (2013) 214 Cal.App.4th 780, 792 [the elements of intentional misrepresentation are: “(1) the defendant made a false representation as to a past or existing material fact; (2) the defendant knew the representation was false at the time it was made; (3) in making the representation, the defendant intended to deceive the plaintiff; (4) the plaintiff justifiably relied on the representation; and (5) the plaintiff suffered resulting damages.”]; see also Cadlo v. Owens-Illinois, Inc. (2004) 125 Cal.App.4th 513, 519 [a cause of action for negligent misrepresentation is comprised of the same elements as a claim for intentional misrepresentation, except there is no requirement of intent to defraud; rather, the defendant must have made the representation without reasonable ground for believing it to be true].)

However, when evaluating the legal sufficiency of a pleading, a court is not bound by the label on a cause of action. (Quelimane Co. v. Stewart Title Guaranty Co. (1998) 19 Cal.4th 26, 38.) “If the complaint states a cause of action under any theory, regardless of the title under which the factual basis for relief is stated, that aspect of the complaint is good against a demurrer.” (Ibid.)

Here, it appears that Plaintiff’s third cause of action attempts to state a cause of action for nondisclosure because it is predicated on nondisclosure of High Medtech’s suspended status. (See SAC, ¶ 40.) Moreover, Bonar’s remaining argument regarding specificity fails to dispose of the third cause of action to the extent it is one for nondisclosure. As articulated above, Plaintiff alleges that High Medtech was suspended by the California Secretary of State sometime in 2012, and the defendants, including Bonar, failed to disclose that fact to her when she entered into the written agreements in 2013 and 2014. Thus, the alleged nondisclosure is pleaded with the requisite particularity.

For these reasons, the demurrer to the third cause of action is OVERRULED.

V. Fourth Cause of Action

In the fourth cause of action for negligence, Plaintiff alleges that the defendants “held themselves out as managing members of [High Medtech] with the authority to enter into agreements to borrow money and to repay loans,” and, “[a]s such, defendants had a duty to make the fullest disclosure of all material facts concerning their business that might effect Plaintiff’s decision to loan money to defendants.” (SAC, ¶¶ 44-45.) The defendants allegedly breached this duty by “failing to disclose that [High Medtech] had been suspended by the California Secretary of State before they entered into written loan agreements with Plaintiff, on or about March 2013 and November 25, 2014 ….” (Id. at ¶ 46.)

The essential elements of a fraud cause of action based on concealment or nondisclosure are: (1) the defendant had a duty to disclose the concealed or suppressed fact to the plaintiff; (2) the defendant intentionally concealed or suppressed the fact with the intent to defraud the plaintiff, and (3) the plaintiff was damaged as a result. (Jones v. ConocoPhillips (2011) 198 Cal.App.4th 1187, 1198; Hahn v. Mirda (2007) 147 Cal.App.4th 740, 748.)

As Bonar persuasively argues, Plaintiff does not allege facts establishing that the defendants had a duty to disclose High Medtech’s suspended status to her. There are four circumstances in which nondisclosure or concealment may constitute actionable fraud: “(1) when the defendant is in a fiduciary relationship with the plaintiff; (2) when the defendant had exclusive knowledge of material facts not known to the plaintiff; (3) when the defendant actively conceals a material fact from the plaintiff; and (4) when the defendant makes partial representations but also suppresses some material facts.” (LiMandri v. Judkins (1997) 52 Cal.App.4th 326, 336; see also Smith v. Ford Motor Co. (N.D. Cal. 2010) 749 F.Supp.2d 980, 987, 993.)

As an initial matter, there are no facts alleged in the SAC showing that there was a fiduciary relationship between Plaintiff and the defendants. Instead, the allegations indicate that the parties merely engaged in arms-length loan transactions.

Furthermore, the fourth cause of action does not allege that: any of the defendants made affirmative representations, but did not disclose facts which materially qualify the facts disclosed or which render the disclosure likely to mislead; the facts are known or accessible only to the defendants and defendants knew that the facts were not known to or reasonably discoverable by Plaintiff; or the defendants actively concealed discovery from Plaintiff. (See Warner Constr. Corp. v. City of Los Angeles (1970) 2 Cal.3d 285, 294; see also Bank of America Corp. v. Super. Ct. (2011) 198 Cal.App.4th 862, 870–871.)

Accordingly, the demurrer to the fourth cause of action is SUSTAINED with 10 days’ leave to amend.

VI. Fifth Cause of Action

In the fifth cause of action for alter ego liability, Plaintiff alleges that Bonar and Gnahoui are the alter egos of High Medtech because High Medtech was inadequately capitalized at the time the defendants entered into the loan agreements; High Medtech did not have the financial resources to pay its debts; Gnahoui and Bonar “had a unity of interests and treated [High Medtech] as their ‘alter ego’ ”; upholding the corporate form would sanction a fraud or promote injustice; and it would be inequitable to treat High Medtech as a limited liability corporation. (SAC, ¶¶ 50-56.)

As a preliminary matter, though not raised by the parties, while “alter ego” is presented as a cause of action, it is “not itself a claim for substantive relief [such as a] breach of contract.” (Wells Fargo Bank, National Association v. Weinberg (2014) 227 Cal.App.4th 1, 7; Hennessey’s Tavern, Inc. v. American Air Filter Co. (1988) 204 Cal.App.3d 1351, 1358-59.) Instead, it is procedural with the purpose to disregard the corporate entity as a distinct defendant and to hold the alter ego individuals liable on the obligations of the corporation where the corporate form is being used by the individuals to escape personal liability, sanction a fraud, or promote injustice. (Ibid.) Therefore, even if Plaintiff had properly pleaded the alter ego theory of liability, as a matter of law, Plaintiff cannot state a separate substantive cause of action for alter ego.

Accordingly, the demurrer to the fifth cause of action is SUSTAINED without leave to amend. (See Jenkins v. JP Morgan Chase Bank, N.A. (2013) 216 Cal.App.4th 497, 535 [leave to amend should be denied where the nature of the claim is clear and no liability exists under substantive law].)
VII. Sixth Cause of Action

In the sixth cause of action for conspiracy, Plaintiff alleges that the “defendants … knowingly and willfully conspired and agreed among themselves to fraudulently fail to disclose to [her] that [High Medtech] had been suspended by the California Secretary of State before they entered into written loan agreements with [her] ….” (SAC, ¶ 58.)

As Bonar persuasively argues, no cause of action has been stated because conspiracy is not a legally cognizable cause of action. “Conspiracy is not a cause of action, but a legal doctrine that imposes liability on persons who, although not actually committing a tort themselves, share with the immediate tortfeasors a common plan or design in its perpetration.” (Applied Equipment Corp. v. Litton Saudi Arabia Ltd. (1994) 7 Cal.4th 503, 510-11; Kidron v. Movie Acquisition Corp. (1995) 40 Cal.App.4th 1571, 1581.) “Standing alone, a conspiracy does no harm and engenders no tort liability. It must be activated by the commission of an actual tort.” (Ibid.)

Furthermore, Bonar persuasively asserts that even assuming a claim for conspiracy could be alleged, no cause of action for conspiracy has been stated because the averments forming the basis of this claim are conclusory. A claim for conspiracy must be properly pleaded and conclusory allegations of conspiracy will not withstand demurrer. (See Daniels v. Select Portfolio Servicing, Inc. (2016) 246 Cal.App.4th 1150, 1173.) To allege a conspiracy, a plaintiff must plead “(1) the formation and operation of the conspiracy; (2) the wrongful act or acts done pursuant thereto; and (3) the damage resulting.” (Mosier v. Southern California Physicians Insurance Exchange (1998) 63 Cal.App.4th 1022, 1048.) A plaintiff must also aver a defendant had “actual knowledge that a tort [wa]s planned and concur[red] in the tortious scheme with knowledge of its unlawful purpose.” (Kidron v. Movie Acquisition Corp. (1995) 40 Cal. App. 4th 1571, 1582.) Here, there are no factual allegations demonstrating the formation and operation of the alleged conspiracy or that Bonar had actual knowledge that a tort was planned.

For these reasons the demurrer to the sixth cause of action is SUSTAINED with 10 days’ leave to amend.

VIII. Seventh Cause of Action

In the seventh cause of action for violation of the UCL, Plaintiff alleges that the defendants’ wrongful conduct as alleged in the SAC constitutes unfair business practices in violation of the UCL. (SAC, ¶¶ 64-66.)

“The UCL prohibits, and provides civil remedies for, unfair competition, which it defines as ‘any unlawful, unfair or fraudulent business act or practice.’ Its purpose ‘is to protect both consumers and competitors by promoting fair competition in commercial markets for goods and services.’ ” (Kwikset Corp. v. Super. Ct. (2011) 51 Cal.4th 310, 320, citations omitted.) “Because … section 17200 is written in the disjunctive, it establishes three varieties of unfair competition-acts or practices which are unlawful, or unfair, or fraudulent. In other words, a practice is prohibited as unfair or deceptive even if not unlawful and vice versa.” (Puentes v. Wells Fargo Home Mortgage, Inc. (2008) 160 Cal.App.4th 638, 644, citations and quotations marks omitted.) Here, Plaintiff’s claim is predicated on the defendants’ purportedly unfair, unlawful, and fraudulent business practices.

Bonar’s arguments primarily address the unfair and unlawful prongs. First, Bonar argues that the nondisclosure cannot constitute an unfair business practice as a matter of law because “[a]doption of [Plaintiff’s] position would impose a duty upon businesses to affirmatively report their corporate status to lenders prior to receiving or extending loans, despite the fact that the law otherwise imposes do such duty.” (Mem. Ps. & As., p. 11:13-15.) Second, Bonar argues that the allegation of unlawful conduct is insufficient to establish a violation of the UCL because there is no allegation that Plaintiff is a consumer. Notably, these two arguments do not address the fraudulent prong.

The only argument proffered by Bonar regarding the fraudulent prong is the following sentence: “Most importantly, there are simply no allegations other than pure boilerplate that [Bonar] made any act, omission or representation personally that was unlawful, unfair or fraudulent.” (Mem. Ps. & As., p. 12:2-5.) However, as previously stated, the nondisclosure alleged in the third cause of action is pleaded with the requisite particularity. Therefore, Bonar does not demonstrate that the claim, to the extent it is based on the fraudulent prong on the UCL, is inadequate.

Accordingly, the demurrer to the seventh cause of action is OVERRULED