Case Name: KAT Builders, Inc., et al. v. Emeric J. McDonald, et al.
Case No.: 17CV318572

I. Background

This lawsuit arises from a dispute over a real estate development project. Plaintiffs Kevin DeNardi, Ian Carney, Carney Construction Consulting, Inc., and KAT Builders, Inc. (doing business as D&C Development) (collectively, “Plaintiffs”) allege they purchased and developed real property in Mountain View, California on behalf of defendants Emeric J. McDonald and John Barton of Octane Fayette, LLC (collectively, “Defendants”) based on the promise that they would receive a share of the profits from Defendants’ subsequent sale of the property.

According to the allegations in the first amended complaint (“FAC”), Ian Carney (“Carney”) operated a development business known as Carney Construction Consulting, Inc. (“Carney Consulting”) and previously worked to develop real estate with Emeric J. McDonald and John Barton. In 2012, Carney and coplaintiff Kevin DeNardi (“DeNardi”) discovered a valuable property located on Fayette Drive in Mountain View (the “Fayette Property”) and proposed developing it in partnership with Defendants.

Plaintiffs directed the DeNardi Group to purchase the Fayette Property in December 2013 with some investment from Defendants and “with the intention of assigning the [Purchase and Sale Agreement] to [them] during escrow, as they had previously discussed [ ].” (FAC, ¶¶ 13-14.) In January 2014, the parties met to discuss the investment in and development of the Fayette Property. (FAC, ¶ 14.) Defendants agreed to “assume” the Purchase and Sale Agreement, while Plaintiffs agreed to develop the Fayette Property by conducting “all construction operations, including construction budgeting, estimating, and obtaining financing, working with the [City] to obtain all necessary entitlements[,] and working with design professionals and contractors. . . .” (FAC, ¶ 14.)

Plaintiffs made substantial progress on the development of the Fayette Property and received an offer to purchase the property for $20,000,000 in September 2016. (FAC, ¶ 21.) Plaintiffs notified Defendants, who thereafter negotiated and executed a contract with the buyer. (FAC, ¶ 21.) But several days before closing, the buyer withdrew its offer. (FAC, ¶ 21.) Although Defendants promised Plaintiffs would be reimbursed for their contributions, they refused to share profits with Plaintiffs in the event of a sale to a new buyer. (FAC, ¶ 22.) “This lawsuit follow[ed].” (FAC, ¶ 22.)

Plaintiffs assert causes of action against Defendants for: (1) breach of contract: (2) breach of fiduciary duty; (3) breach of the implied covenant of good faith and fair dealing; (4) promissory fraud; (5) quantum meruit; (6) promissory estoppel; and (7) declaratory relief.

Currently before the Court is Defendants’ demurrer to the second, third, fourth, and seventh causes of action on the ground of failure to state facts sufficient to constitute a cause of action.

II. Demurrer

As a preliminary matter, the Court observes that some of the challenged causes of action have since been dismissed. Carney and Carney Consulting (collectively, “Carney Plaintiffs”) voluntarily dismissed the seventh cause of action for declaratory relief. Additionally, DeNardi and KAT Builders, Inc. (collectively, “DeNardi Plaintiffs”) voluntarily dismissed the third, fourth, and seventh causes of action as asserted by them. Consequently, the demurrer to the seventh cause of action is MOOT. Additionally, the demurrer to the third and fourth causes of action as asserted by DeNardi Plaintiffs is MOOT. The Court considers solely whether the demurrer is sustainable with respect to the second cause of action as asserted by both DeNardi Plaintiffs and Carney Plaintiffs as well as the third and fourth causes of action as asserted by Carney Plaintiffs only.

A. Second Cause of Action

The second cause of action is for breach of fiduciary duty. Defendants argue the Court should sustain the demurrer to the second cause of action because it is duplicative of the first cause of action for breach of contract. This argument is unavailing. As the Sixth District has explained, the fact that causes of action are duplicative “is not a ground on which a demurrer may be sustained.” (Blickman Turkus, LP v. MF Downtown Sunnyvale, LLC (2008) 162 Cal.App.4th 858, 889-90, citing Code Civ. Proc., § 430.10.) For context, “[a] quarter-century ago the code authorized a motion to strike ‘irrelevant and redundant’ matter from a pleading. [Citation.]” (Id. at p. 890, original italics.) “But the parallel provision now empowers the court only to “[s]trike out any irrelevant, false, or improper matter inserted in any pleading.” (Ibid., quoting Code Civ. Proc., § 436, subd. (a).) “The elimination of the reference to redundancy may have rested on the irreproachable rationale that it is a waste of time and judicial resources to entertain a motion challenging part of a pleading on the sole ground of repetitiveness. (See Civ. Code, § 3537 [‘Superfluity does not vitiate.’].)” (Ibid.) “This is the sort of defect that, if it justifies any judicial intervention at all, is ordinarily dealt with most economically at trial, or on a dispositive motion such as summary judgment.” (Ibid.)

Additionally, when a defendant argues a separately denominated claim is duplicative of some other claim asserted, he or she is essentially just pointing out that the claim is mislabeled. Arguably, the rationale articulated by the Sixth District applies with equal force to such an argument. (See Blickman Turkus, LP, supra, 162 Cal.App.4th at p. 890.) Furthermore, mislabeling of a claim is not a basis for sustaining a demurrer. (Quelimane Co. v. Stewart Title Guaranty Co. (1998) 19 Cal.4th 26, 38.) When evaluating the legal sufficiency of a pleading, a court is not bound by the label on a cause of action. (Ibid.) “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.) Thus, absent an argument that no cause of action has been stated, a demurrer is not sustainable based on the bare assertion that a claim is, in actuality, a different claim or identical to some other claim asserted. (See ibid.)

Defendants also assert “Plaintiffs plead no facts that would support a fiduciary relationship other than their allegations that a partnership was formed.” (Mem. of Pts. & Auth. at p. 6:15-16.) The existence of a fiduciary relationship is an essential element of a claim for breach of fiduciary duty. (Enea v. Super. Ct. (2005) 132 Cal.App.4th 1559, 1566.) A partnership is a fiduciary relationship. (Id. at pp. 1564-66.) As Defendants acknowledge, Plaintiffs allege the parties formed a partnership to develop the Fayette Property. And so Plaintiffs do allege the existence of a fiduciary relationship. To be sure, Defendants do not cite any authority or provide an explanation to support a contrary conclusion.

Although not especially clear, particularly in light of Defendants’ focus on duplicativeness, it appears perhaps they may also be taking the position that Plaintiffs do not allege any breach of the fiduciary duties arising from their partnership. But other than briefly acknowledging the existence of a duty of loyalty, Defendants do not actually discuss what these duties are and the scope thereof as necessary to support the conclusion that Plaintiffs do not adequately allege a breach of those duties. (See generally Enea, supra, 132 Cal.App.4th at p. 1564 [summarizing partners’ fiduciary duties].) Thus, the demurrer is not sustainable on this basis.

For these reasons, the demurrer to the second cause of action as asserted by both Carney Plaintiffs and DeNardi Plaintiffs is OVERRULED.

B. Third Cause of Action

The third cause of action, asserted solely by Carney Plaintiffs, is for breach of the implied covenant of good faith and fair dealing.

“Every contract contains an implied covenant of good faith and fair dealing providing that no party to the contract will do anything that would deprive another party of the benefits of the contract.” (Digerati Holdings, LLC v. Young Money Entertainment, LLC (2011) 194 Cal.App.4th 873, 885.) “The implied covenant protects the reasonable expectations of the contracting parties based on their mutual promises.” (Ibid.) “The scope of conduct prohibited by the implied covenant depends on the purposes and express terms of the contract.” (Ibid.)

Because the covenant of good faith and fair dealing is an implied term of a contract, “its breach [necessarily is] a breach of the contract, although a breach of a consensual (i.e., an express or implied-in-fact) contract term will not necessarily constitute a breach of the covenant.” (Careau & Co. v. Security Pacific Business Credit, Inc. (1990) 222 Cal.App.3d 1371, 1393-94.) To state a claim, a plaintiff must allege the defendant’s conduct, “whether or not it also constitutes a breach of a consensual contract term, demonstrates a failure or refusal to discharge contractual responsibilities, prompted not by an honest mistake, bad judgment or negligence but rather by a conscious and deliberate act, which unfairly frustrates the agreed common purposes and disappoints the reasonable expectations of the other party thereby depriving that party of the benefits of the agreement.” (Id. at p. 1395.)

Defendants argue the third cause of action “should also be dismissed as impermissibly duplicative of the breach of contract cause of action.” (Mem. of Pts. & Auth. at p. 6:25-26.) But as discussed above, that is not a basis for sustaining a demurrer. (Blickman Turkus, LP, supra, 162 Cal.App.4th at pp. 889-90.) Additionally, contrary to what Defendants may be suggesting, there are circumstances when conduct constitutes a breach of an express term and of the implied covenant. (See, e.g., Thrifty Payless, Inc. v. The Americana at Brand, LLC (2013) 218 Cal.App.4th 1230, 1244.) Thus, Defendants’ focus on whether the third cause of action is duplicative is misguided.

To the extent Defendants intended to challenge the sufficiency of Carney Plaintiffs’ breach allegation, they do not substantiate their argument. To this point, the issue is simply whether Carney Plaintiffs allege frustration of the purpose of the contract resulting in deprivation of the benefits to which they were entitled. Here, Plaintiffs allege Defendants “unfairly interfered. . . with [their] right to receive the benefits of the Partnership Agreement, Oral Agreement, and/or Good Faith Agreement by failing to perform [their] obligations, as alleged in the foregoing paragraphs.” (FAC, ¶ 44.) Defendants appear to interpret this allegation as an allegation that they breached the express terms of the parties’ agreements only, exclusive of the implied covenant of good faith and fair dealing. But Defendants do not identify any logical or legal basis for construing the allegation in that manner. Furthermore, even accepting Defendants’ narrow reading of that allegation, they do not clearly articulate how it is insufficient. Ultimately, Defendants do not provide legal authority or analysis to support the conclusion that Carney Plaintiffs’ breach allegation is insufficient.

Based on the foregoing, the demurrer to the third cause of action as asserted by Carney Plaintiffs is OVERRULED.

C. Fourth Cause of Action

The fourth cause of action is for promissory fraud. Although Defendants take the position that Carney Plaintiffs fail to plead facts sufficient to constitute a cause of action, their supporting arguments are not a model of clarity. Accordingly, the Court first provides some background on this type of claim before addressing the arguments presented.

“‘Promissory fraud’ is a subspecies of the action for fraud and deceit.” (Lazar v. Super. Ct. (1996) 12 Cal.4th 631, 638.) “A promise to do something necessarily implies the intention to perform; hence, where a promise is made without such intention, there is an implied misrepresentation of fact that may be actionable fraud.” (Ibid.) “[T]he plaintiff’s claim does not depend upon whether the defendant’s promise is ultimately enforceable as a contract.” (Ibid.) “‘If it is enforceable, the [plaintiff]. . . has a cause of action in tort as an alternative at least, and perhaps in some instances in addition to his [or her] cause of action on the contract.’” (Ibid., quoting Rest.2d Torts, § 530.)
Defendants assert Carney Plaintiffs “fail to adequately allege promissory fraud on at least two grounds.” (Mem. of Pts. & Auth. at p. 7:23-24.) In other words, Defendants’ position is apparently that there are at least two reasons for concluding the demurrer to the fourth cause of action is sustainable.

Defendants first argue the promissory fraud claim is duplicative. This argument is unavailing for the same reasons set forth above with respect to the second cause of action. (See Blickman Turkus, LP, supra, 162 Cal.App.4th at pp. 889-90.)

Next, Defendants argue “dismissal is warranted because [Carney] Plaintiffs’ promissory fraud claim fails to establish a duty independent of the alleged contract.” (Mem. of Pts. & Auth. at p. 8:2-3.) There are several problems with this argument.

First, although presented as a separate and distinct argument, Defendants appear to simply be repackaging their unavailing argument about duplicativeness. To be sure, the first statement Defendants make in support of their argument is that the claim should be dismissed because it is “identical” to the first cause of action for breach of contract. (Mem. of Pts. & Auth. at p. 8:4-6.) And so to the extent Defendants are simply asserting the claim is duplicative, their argument lacks merit.

Second, in presenting this argument, Defendants inaptly invoke the economic loss rule, which is not implicated here. The economic loss rule was developed to preserve the “distinction drawn between transactions involving the sale of goods for commercial purposes where economic expectations are protected by commercial and contract law, and those involving the sale of defective products to individual consumers who are injured in a manner which has traditionally been remedied by resort to the law of torts.” (Robinson Helicopter Co. v. Dana Corp. (2004) 34 Cal.4th 979, 988 [internal quotation marks and citation omitted].) It “requires a purchaser to recover in contract for purely economic loss due to disappointed expectations, unless he [or she] can demonstrate harm above and beyond a broken contractual promise.” (Ibid.) Put differently, a plaintiff cannot recover in tort for purely economic losses, defined as “damages for inadequate value, costs of repair and replacement of the defective product or consequent loss of profits,” in the absence of a “claim of personal injury or damages to other property.” (Ibid. [internal quotation marks and citations omitted].) Significantly, “tort damages [are] permitted in contract cases” when a plaintiff alleges fraud, particularly “fraud during the contract formation or performance.” (Id. at pp. 989-90.) In other words, contrary to what Defendants represent, “the economic loss rule does not bar [ ] fraud [ ] claims.” (Id. at p. 991.)

To the extent Defendants are suggesting a plaintiff cannot simultaneously assert claims for breach of contract and promissory fraud, irrespective of the economic loss rule, they are mistaken. As the California Supreme Court made clear in Lazar, a plaintiff may plead a claim for promissory fraud as an alternative to a breach of contract claim. (Lazar, supra, 12 Cal.4th at p. 638.)

Finally, Defendants argue Carney Plaintiffs do not allege the essential elements of their claim with particularity. To plead a promissory fraud claim, a plaintiff must allege: (1) the defendant made a misrepresentation, particularly a promise that he or she never intended to perform; (2) the defendant “did not intend to perform the promise when it was made, i.e., had knowledge of its falsity”; (3) the defendant intended to induce reliance on the promise; (4) justifiable reliance; and (5) damages. (Beckwith v. Dahl (2012) 205 Cal.App.4th 1039, 1059-60, citing Lazar, supra, 12 Cal.4th at p. 638.) These elements must be pleaded with particularity. (Moncada v. West Coast Quartz Corp. (2013) 221 Cal.App.4th 768, 776.)

In presenting this argument, Defendants acknowledge Carney Plaintiffs do allege specific facts to support their claim. In the fourth cause of action, Carney Plaintiffs allege they met with Defendants on January 6, 2014 to discuss development of the Fayette Property and that Defendants promised to share the profits from the sale of the property to compensate them for developing it. (FAC, ¶ 48.) Carney Plaintiffs allege Defendants prepared “spreadsheets reflecting the proposed profit allocation between the parties” to induce them to rely on their promise, but that they never actually intended to share these profits. (FAC, ¶ 49.) Carney Plaintiffs claim these spreadsheets and their past working relationship with Defendants caused them to rely on the promise of shared profits and that they lost the “substantial human and financial capital [put] towards the development of the Fayette Property” as a result. (FAC, ¶ 49.) Carney Plaintiffs allege that, had they known Defendants never intended to share profits with them as promised, they would not have worked to develop the Fayette Property by “securing entitlements, working with architects and consultants, and preparing the preexisting structure for demolition” and would simply have sold the property to one of several prospective buyers without involving Defendants in the process. (FAC, ¶ 50.)

In light of these specific allegations, it is not obvious to the Court how Carney Plaintiffs fall short of the pleading standard for promissory fraud. Although Defendants cite authority establishing the essential elements that must be pleaded and the specificity requirement as a general matter, they do not analyze these cases. Additionally, Defendants do not otherwise cite any analogous authority holding similar allegations were not sufficiently specific to state a claim for promissory fraud. Consequently, there is no basis for concluding Defendants fail to allege the essential elements of their claim with specificity.

For the reasons set forth above, Defendants’ arguments are not persuasive. The demurrer to the fourth cause of action as asserted by Carney Plaintiffs is therefore OVERRULED.