Case Name: Meridian Financial Services, Inc., et al. v. Phan, et al.

Case No.: 1-13-CV-254908

Defendant Chicago Title Company (‘Chicago Title”) moves to strike portions of the second amended complaint (“SAC”) filed by plaintiffs Meridian Financial Services, Inc. and Mark Yazdani (collectively, “Plaintiffs”).

 

On May 16, 2014, Plaintiffs filed the SAC against Chicago Title, Lananh Phan (“Phan”) and Diane Do (“Do”) asserting claims for (1) breach of contract, (2) fraud, (3) fraud in the inducement, (4) negligent misrepresentation, (5) violation of unfair business practices act, (6) escrow negligence, (7) negligent supervision, (8) breach of fiduciary duty and (9) breach of contract.  According to the allegations of the SAC, from April 12, 2012 to June 26, 2013, Plaintiffs invested over $5 million with Phan in a gold investment scheme that she touted.  (SAC at ¶ 18.)  Phan purportedly guaranteed Plaintiffs a monthly return of 5%-6% plus full return of their principal.  (Id. at ¶ 16.)  After they reinvested their guaranteed monthly returns, the total amount of money invested with Phan was over $9 million as of October 22, 2013.  (Id. at ¶ 18.)

 

Plaintiffs’ investments operated without incident throughout 2012, during which time Phan verbally confirmed that their monthly returns were “reinvested” into the venture.  (SAC at ¶ 23.)  However, in 2013, Phan informed Plaintiffs that she could not return their money to them because it was in offshore accounts controlled by her unidentified colleagues.  (Id. at ¶ 24.)

 

Plaintiffs allege that Phan, Do and Do’s employer, Chicago Title, formed and operated a conspiracy to defraud them out of their money.  (SAC at ¶¶ 45-47.)  Plaintiffs further allege that the deeds of trust and promissory notes purportedly executed by certain property owners as security for a portion of the funds invested that were notarized and processed by Chicago Title as escrow holder were not in fact signed by those individuals.  (SAC at ¶ 26.)

 

On June 16, 2014, Chicago Title filed the instant motion to strike portions of the SAC, particularly Plaintiffs’ punitive and/or exemplary damages allegations and requests for attorney’s fees.

 

Chicago Title’s request for judicial notice is GRANTED.  (Evid. Code, § 452, subd. (d).)

 

As an initial matter, Plaintiffs concede that their request for attorney’s fees should be stricken, explaining that they mistakenly included this request due to a drafting oversight.  Consequently, this request is stricken.

 

In moving to strike Plaintiffs’ request for punitive and/or exemplary damages, Chicago Title asserts that there are no facts pleaded in the SAC which demonstrate that it intended to vex, injure or annoy Plaintiffs, acted with a conscious disregard of their rights, or had advanced notice of Do’s unfitness and nevertheless employed her.

 

Pursuant to Civil Code section 3294, punitive damages are recoverable where the defendant is guilty of malice, oppression or fraud.  For pleading purposes, merely alleging that a defendant acted with malice, oppression, or fraud in a conclusory manner is insufficient to support a claim for punitive damages.  (See Blengen v. Superior Court (1981) 125 Cal.App.3d 959, 963.)  Ultimate facts supporting a claim for punitive damages must be specifically pleaded.  (See Clausen v. Superior Court (1998) 67 Cal.App.4^th 1253, 1255.)

 

Here, Chicago Title’s liability is predicated primarily on the wrongful acts of its employee, Do, and its alleged awareness of Do and Phan’s illegal Ponzi scheme and despite this awareness, subsequent failure to prevent Do from further participating in the scheme.  With regard to Chicago Title’s liability in its capacity as an employer, Civil Code section 3294, subdivision (b), provides that

 

An employer shall not be liable for damages [] based on the acts of an employee of the employer, unless the employer had advance knowledge of the unfitness of the employee and employed him or her with a conscious disregard of the rights or safety of others or authorized or ratified the wrongful conduct for which the damages are awarded or was personally guilty of oppression, fraud, or malice.  With respect to a corporate employer, the advance knowledge and conscious disregard, authorization, ratification or act of oppression, fraud, or malice must be on the part of an officer, director, or managing agent of the corporation.

Plaintiffs plead that in mid-January 2013, Chicago Title became aware that Do was participating in a Ponzi scheme, yet continued to allow her to falsify escrow instructions relating thereto.  Chicago Title insists that there are no allegations that its  purported failure to act in January 2013 caused any harm to Plaintiffs and the only logical reading of the SAC is that any harmful activity by Do pre-dated any notice of wrongdoing by Chicago Title.  However, this assertion ignores the express allegations of the SAC, which state that in February 2013, Do was able to “clos[e] escrow on another tranche of Meridian’s gold investment with Phan” and that the escrow had not been handled correctly, with Do failing to obtain genuine signatures, disbursing funds prior to closing, and disbursing funds to Phan rather than the persons who appeared as borrowers in the paperwork.  (SAC at ¶ 30C.)  Therefore, Phan was able to obtain further funds from Meridian, thereby causing it to incur further damage, despite Chicago Title’s knowledge of the scheme.  Chicago Title’s alleged failure to act to prevent Do from conducting further escrow transactions with Phan and thus permit escrow to close is sufficient to plead ratification for the purposes of employer liability pursuant to Civil Code section 3294, subdivision (b).  Consequently, Plaintiffs have sufficiently pleaded facts to support a request for punitive damages.

 

In accordance with the foregoing analysis, Chicago Title’s motion to strike is GRANTED IN PART and DENIED IN PART.  The motion is GRANTED WITHOUT LEAVE TO AMEND as to Plaintiffs’ request for attorney’s fees and DENIED as to Plaintiffs’ request for punitive damages.