Case Name: Michael Maslana, et al. v. Hunter Technology Corporation, et al.

Case No.: 1-15-CV-286656

Defendant Joseph O’Neil’s Demurrer to First Amended Complaint

In or about January 2009, plaintiff Michael Maslana (“Maslana”) became president and CEO of NBS Design, Inc. (“NBS”). (First Amended Complaint (“FAC”), ¶9.) In or about May 2013, plaintiff Maslana and defendant Joseph O’Neil (“O’Neil”), CEO of defendant Hunter Technology Corporation (“Hunter”), began discussing a merger between NBS and Hunter. (FAC, ¶10.) At that time, Chris Alessio (“Alessio”) was vice-president of sales and marketing for NBS and Ian Grover (“Grover”) was vice-president of engineering for NBS. (Id.) In the spring of 2013, Maslana, Alessio, and Grover owned a combined 65.68% of the stock in NBS. (Id.)

The companies discussed valuations of $12 million each for Hunter and NBS with Hunter acquiring NBS and providing for an equal equity split. (FAC, ¶11.) On June 26, 2013, Maslana, Alessio, and O’Neil met and agreed that the transaction would take the form of an asset purchase in which Hunter would acquire NBS’s assets. (FAC, ¶12.) It was further agreed that Maslana, Alessio, and Grover would become employees of Hunter after the assets sale and would receive stock options in Hunter. (Id.)

On June 27, 2013, O’Neil sent Maslana an email confirming Maslana, Alessio, and Grover would be hired by Hunter and would receive stock options in Hunter. (FAC, ¶13.) The amount of stock offered to Maslana was an amount equivalent to 22% of Hunter after the acquisition of NBS’s assets. (Id.)

By late September 2013, the parties agreed Hunter would purchase assets of NBS and NBS would thereafter cease to exist. (FAC, ¶14.) A formal written asset purchase agreement would be executed between NBS and Hunter. (Id.) Hunter would hire Maslana, Alessio, and Grover as employees. (Id.) Hunter would provide Maslana, Alessio, and Grover stock options in Hunter. (Id.) The strike price for the options would be $1.20 per share. (Id.) The amount of options was based upon a post-NBS asset acquisition formula with Maslana receiving stock options equivalent to a 22% interest in Hunter. (Id.)

Maslana and O’Neil met in late September 2013 regarding integration between Hunter and NBS and agreed that Grover would handle operations and design, Alessio would handle sales and marketing and design, and Maslana would handle finance and intellectual property after the asset purchase. (FAC, ¶15.) Maslana and O’Neil further agreed that Maslana would become Director of Business Development. (Id.)

On or about October 11, 2013, defendant HTC-EIAC, Inc. (“HTC”), a wholly-owned acquisition subsidiary of Hunter, and NBS entered into an asset purchase agreement (“APA”). (FAC, ¶¶5 and 16 and Exh. D.) Pursuant to the APA, HTC agreed to purchase a significant portion of NBS’s assets subject to certain terms and conditions customary in such a transaction. (Id.)

On October 13, 2013, O’Neil sent Maslana an offer letter for employment with Hunter as Director of Business Development. (FAC, ¶17.) The offer letter stated Maslana’s employment would commence on January 1, 2014 and Maslana was granted stock options to purchase 5,043,983 shares of Hunter common stock. (FAC, ¶17 and Exh. E.)

On or about October 21, 2013, Maslana received a letter from TriNet Group, Inc. (“TriNet”) stating that as an employee of Hunter, Maslana was eligible to participate in Hunter’s benefit program which was being administered by TriNet. (FAC, ¶18.)

To compensate Maslana for work done prior to January 1, 2014, Maslana and Hunter entered into a temporary Consulting Services Agreement effective October 14, 2013 which provided, among other things, that Maslana would provide consulting services to Hunter. (FAC, ¶19.)

In or about October 2013, Alessio and Grover, who have been employed by Hunter since the asset purchase, enter into agreements with Hunter for the issuance of options of Hunter common stock. (FAC, ¶20.) Hunter reneges on its agreement to issue stock options to Maslana. (Id.)

On or about October 10, 2014, Hunter terminates its employment agreement with Maslana and did not provide stock options to Maslana, contrary to agreement. (FAC, ¶21.) At the time of his termination, Maslana is informed and believes O’Neil had begun negotiations to sell Hunter. (Id.)

Hunter’s and O’Neil’s plan had always been to merge with NBS to create a more valuable company than Hunter had previously been and then to sell the merged company for substantially more than either Hunter or NBS were worth separately. (FAC, ¶22.) To induce Maslana, Alessio, and Grover to sell NBS to Hunter, Hunter promised to hire them and provide stock options. (Id.) After the APA closed, Hunter needed Alessio to maintain and grow sales and needed Grover to manage engineering and the design group. (Id.) Hunter also needed Maslana to wind up NBS and assist with the smooth transition of NBS customers and integration of NBS and Hunter. (Id.) Once completed, Hunter no longer needed Maslana to achieve its goal of selling the combined Hunter/NBS company. (Id.) Hunter terminated its relationship with Maslana and refused to provide Maslana with the stock options it promised. (Id.) In April 2015, defendant Sparton Corporation (“Sparton”) acquired Hunter for approximately $55 million. (FAC, ¶23.)

On June 27, 2017, plaintiff Maslana, individually and as authorized representative of NBS, filed the operative FAC which asserts the following causes of action:

(1) Breach of Contract [versus Hunter and Sparton]
(2) Breach of Implied Covenant of Good Faith and Fair Dealing [versus Hunter and Sparton]
(3) Breach of Contract – Promissory Estoppel [versus Hunter and Sparton]
(4) Fraud – Promise Without Intent to Perform [versus O’Neil, Hunter, and Sparton]
(5) Fraud –Intentional Misrepresentation [versus O’Neil, Hunter, and Sparton]
(6) Breach of Contract – Unjust Enrichment [versus Hunter and Sparton]
(7) Specific Performance [versus HTC and Sparton]
(8) Breach of Contract [versus Hunter and Sparton]
(9) Wrongful Termination in Violation of Public Policy [versus Hunter]

On September 25, 2017, defendant O’Neil filed the motion now before the court, a demurrer to the fourth and fifth causes of action of the FAC.

I. Request for judicial notice.

In opposition, plaintiff Maslana requests judicial notice of the court’s order dated October 5, 2017 in this action regarding defendants and cross-complainant Hunter and Spartan’s demurrer to the FAC. Evidence Code section 452, subdivision (d) states that the court may take judicial notice of “[r]ecords of any court of this state.” This section of the statute has been interpreted to mean that the trial court may take judicial notice of the existence of the court’s own records. Evidence Code section 452 and 453 permit the trial court to “take judicial notice of the existence of judicial opinions and court documents, along with the truth of the results reached—in the documents such as orders, statements of decision, and judgments—but [the court] cannot take judicial notice of the truth of hearsay statements in decisions or court files, including pleadings, affidavits, testimony, or statements of fact.” (People v. Woodell (1998) 17 Cal.4th 448, 455.) Accordingly, plaintiff’s request for judicial notice in opposition to O’Neil demurrer is GRANTED.

II. Defendant O’Neil’s demurrer to the fourth and fifth causes of action [fraud – promise without intent to perform/ fraud – intentional misrepresentation] of plaintiff Maslana’s FAC is OVERRULED.

Defendant O’Neil demurs to the fourth and fifth causes of action on the basis that plaintiff Maslana has not adequately alleged defendant O’Neil’s intention not to perform. “‘Promissory fraud’ is a subspecies of fraud and deceit. 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. An action for promissory fraud may lie where a defendant fraudulently induces the plaintiff to enter into a contract.” (Engalla v. Permanente Medical Group, Inc. (1997) 15 Cal.4th 951, 973 – 974; see also CACI, No. 1902.) In Tarmann v. State Farm Mutual Automobile Ins. Co. (1991) 2 Cal.App.4th 153, 159, the court explained, “To maintain an action for deceit based on a false promise, one must specifically allege and prove, among other things, that the promisor did not intend to perform at the time he or she made the promise and that it was intended to deceive or induce the promisee to do or not do a particular thing.”

The allegation concerning defendant O’Neil’s intention is plainly found at paragraphs 40 and 48 which allege, “At the time Hunter made the foregoing promise to Maslana, neither Hunter nor O’Neil had any intention of performing it” and “O’Neil and Hunter did not intend to grant Maslana the stock options.” Intent is an averment of fact which this court must accept as true. (Cf. 5 Witkin, California Procedure (4th ed. 1997) Pleading, §684, p. 143—“Intent, like knowledge, is a fact. Hence, the averment that the representation was made with the intent to deceive the plaintiff, or any other general allegation with similar purport, is sufficient.”)

Defendant O’Neil argues further that such allegations conflict with other factual allegations which evidence defendant O’Neil’s actual intent to perform. For instance, defendant O’Neil points to paragraph 17 and Exhibit E of the FAC wherein plaintiff Maslana alleges, “On October 13, 2013, O’Neil sent Maslana an offer letter for his employment with Hunter as Director of Business Development. The offer letter provided that Maslana’s employment would commence on January 1, 2014 and that he was granted options to purchase 5,043,983 shares of Hunter common stock.”

“Moreover, ‘ “something more than nonperformance is required to prove the defendant’s intent not to perform his promise.” [Citations.] … [I]f plaintiff adduces no further evidence of fraudulent intent than proof of nonperformance of an oral promise, he will never reach a jury.’ [Citation.]” (Magpali v. Farmers Group, Inc. (1996) 48 Cal.App.4th 471, 481.) Defendant O’Neil’s argument, however, concerns plaintiff Maslana’s ability to prove his allegations. “A demurrer tests only the legal sufficiency of the pleading. It admits the truth of all material factual allegations in the complaint; the question of plaintiff’s ability to prove these allegations, or the possible difficulty in making such proof does not concern the reviewing court.” (Committee on Children’s Television, Inc. v. General Foods Corp. (1983) 35 Cal.3d 197, 213 – 214.) If true, the allegation at paragraph 17 certainly undercuts plaintiff’s assertion that defendant O’Neil did not have the intent to perform his promise when made, but the court’s function on demurrer is not to question plaintiff’s ability to prove his allegations.

“Where the dates alleged in the complaint show the action is barred by the statute of limitations, a general demurrer lies.” (Weil & Brown, et al., CAL. PRAC. GUIDE: CIV. PROC. BEFORE TRIAL (The Rutter Group 2016) ¶7:50, p. 7(I)-30 citing Iverson, Yoakum, Papiano & Hatch v. Berwald (1999) 76 Cal.App.4th 990, 995.) Alternatively, defendant O’Neil contends the fourth and fifth causes of action are barred by the three-year statute of limitations for fraud claims. (See Code Civ. Proc., §338, subd. (d).) Code of Civil Procedure section 338, subdivision (d) specifically states, “The cause of action … is not to be deemed to have accrued until the discovery, by the aggrieved party, of the facts constituting the fraud or mistake.” (Code Civ. Proc. §338, subd. (d).)

In demurring, defendant O’Neil directs the court’s attention to paragraph 20 of the FAC where plaintiff alleges, “In or about October 2013, Alessio and Grover, who have been employed by Hunter since the asset purchase, enter into agreements with Hunter for the issuance of options of Hunter common stock. Hunter reneges on its agreement to issue the Stock Options to Maslana.” Defendant O’Neil contends, based on this allegation, that the cause of action for fraud accrued in October 2013 since the purported promise was to give plaintiff Maslana stock options, and plaintiff would know that the promise was broken when it was reneged in October 2013. Since plaintiff Maslana did not file these claims for fraud against O’Neil until the filing of this FAC on June 27, 2017, more than three years after October 2013, it is defendant O’Neil’s position that the causes of action for fraud are barred.

In opposition, plaintiff Maslana argues defendant O’Neil incorrectly reads paragraph 20 and assumes the reference to October 2013 in the first sentence also applies to the second sentence. However, it is plaintiff Maslana’s position that the second sentence stating that, “Hunter reneges on its agreement to issue Stock Options to Maslana,” makes no reference to date or time. “A demurrer based on a statute of limitations will not lie where the action may be, but is not necessarily, barred. [Citation.] In order for the bar of the statute of limitations to be raised by 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. [Citation.]” (Marshall v. Gibson, Dunn & Crutcher (1995) 37 Cal.App.4th 1397, 1403; see also Richtek USA, Inc. v. uPI Semiconductor Corporation (2015) 242 Cal.App.4th 651, 658.)

Plaintiff Maslana’s point is well taken. It does not appear clearly and affirmatively on the face of the pleading what date Hunter/O’Neil reneged on the promise to provide plaintiff Maslana with stock options. Accordingly, defendant O’Neil’s demurrer to the fourth and fifth causes of action in plaintiff Maslana’s FAC on the ground that the pleading does not state facts sufficient to constitute a cause of action [Code Civ. Proc., §430.10, subd. (e)] for fraud is OVERRULED.