Case Name: Pointek, Inc. v. Vello Systems, Inc., et al.
Case No.: 16-CV-292465

Defendants Sonus Networks, Inc. (“Sonus Networks”), Treq Labs, Inc. (“Treq”) and Lumen Networks, LLC (“Lumen Networks”) each demur to the first amended complaint (“FAC”) filed by plaintiff POINTek, Inc. (“Plaintiff”) and move to strike portions contained therein.

This action arises out of the alleged breach of a contract for the sale of goods. According to the allegations of the FAC, Plaintiff, a manufacturer and seller of telecom products, provides such products to defendant Vello Systems, Inc. (“Vello Systems”), a telecommunications system producer. (FAC, ¶ 12.) Vello Systems buys telecommunications components from Plaintiff by issuing a Purchase Order (“PO”) and Plaintiff fulfills the order by the components with an invoice. (Id.) Typically, based on system specifications set by Vello Systems, Plaintiff issues a quote and Vello Systems issues a PO. (Id., ¶ 13.) Plaintiff then manufacturers the product and sends the delivery notice via email with an invoice, a copy of which is enclosed in the shipping container. (Id.) Subsequently, Plaintiff expects payment from Vello Systems pursuant to the terms of the invoice. (Id.) There are currently seven invoices issued between April 2012 and November 2013 that have not been paid by Vello Systems and thus remain outstanding and due. (Id., ¶ 15.)

In August and September 2014, Vello Systems laid off all of its employees and closed its offices. (FAC, ¶ 29.) Vello Systems’ principal, defendant Karl May (“May”), subsequently created two new companies of which he is the CEO: Treq and Lumen Networks, which share the same address. (Id., ¶ 30.) Plaintiff alleges that May directed the transfer of Vello Systems’ assets to Treq and Lumen Networks in order to deprive it of the monies that it is owed. (Id., ¶ 31.) On January 2, 2015, May sold Treq to Sonus Networks for $10 million. May purportedly perpetuated a fraudulent scheme to discharge all of Vello Systems’ debts. (Id., ¶ 34.)

On June 1, 2016, Plaintiff filed the FAC asserting the following causes of action: (1) breach of contract (against all defendants); (2) fraudulent transfer (against all defendants); (3) promissory fraud (against all defendants); (4) conversion (against all defendants); and (5) unjust enrichment. On July 6, 2016, Sonus Networks filed the instant demurrer to the FAC and each of the five causes of action asserted therein on the ground of failure to state facts sufficient to constitute a cause of action, and to the fifth on the additional ground of uncertainty. (Code Civ. Pro., § 430.10, subds. (e) and (f).) Sonus Networks also filed a motion to strike Plaintiffs’ request for punitive damages. (Code Civ. Proc., §§ 435 and 436.) That same day, Treq and Lumen Networks filed nearly identical motions. Plaintiff opposes each of the foregoing motions.

Sonus Networks’ Motions

As an initial matter Sonus Networks’ requests for judicial notice of the Form 8-k submitted by the defendant to the United States Securities and Exchange Commission (“SEC”) are GRANTED IN PART. The requests are GRANTED as to the document’s existence but not the truth of its contents, which were provided to the SEC by Sonus Networks. (Evid. Code, § 452, subd. (h); see Stormedia, Inc. v. Superior Court (1999) 20 Cal.4th 449, 456, fn. 9 [“When judicial notice is taken of a document … the truthfulness and proper interpretation of the document are disputable”].)

Turning to the demurrer, based on the contents of the foregoing document, Sonus Networks requests that its motion be sustained in its entirety because it did not purchase Treq or assume its liabilities and instead only purchased “certain assets.” It argues that absent successor liability, which it contends is demonstrably not applicable here, no claims can be stated against it because it was not a party to any agreements with Plaintiff and never in fact interacted with Plaintiff in any capacity. Thus, it concludes, Plaintiff cannot plead any of the elements necessary to state claims against it for breach of contract, fraudulent transfer, promissory fraud, conversion, and unjust enrichment and its demurrer should be sustained without leave to amend.

In its opposition, Plaintiff asserts that all of its claims against Sonus Networks are predicated on the fact that the company assumed all of the liabilities owed by Treq when is acquired that company for $10 million on January 2, 2015. (FAC, ¶ 32.) In other words, it contends that Sonus Networks is liable for its predecessor’s debts and therefore claims arising out of the unpaid invoices can be stated against it.

Generally, a corporation which purchases the principal assets of another does not assume the seller’s liabilities. (See Maloney v. American Pharmaceutical Co. (1988) 207 Cal.App.3d 282, 287.) However, exceptions have been carved out to this general rule. Specifically, a successor corporation that obtains all of the assets of its predecessor will assume its debts and liabilities where (1) the purchaser expressly or impliedly agrees to such assumption, (2) the transaction amounts to a consolidation or merger of the two corporations, (3) the purchasing corporation is merely a continuation of the selling corporation, or (4) the transaction is entered into fraudulently to escape liability for debts. (Ray v. Alad Corp. (1977) 19 Cal.3d 22, 28.) Based on what is set forth in the FAC, it seems relatively clear that Plaintiff’s claims against Treq and Lumen Networks are based on the third and fourth exceptions, with Plaintiff alleging that all the material assets of Vello Systems were transferred to Treq and Lumen Networks, all key employees and officers of Vello Systems were working for those entities, and May, the principal of Vello Systems, directed the transfer of assets from that company to Treq and Lumen Networks in order to “deprive Plaintiff of the money owed and due.” (FAC, ¶ 31.) A corporation “cannot escape liability be a mere change or name or a shift of assets when and where it is shown that the new corporation is, in reality, but a continuation of the old. Especially … when actual fraud or the rights of creditors are involved ….” (Blank v. Olcovich Shoe Corp. (1937) 20 Cal.App.2d 456, 461.) This is principally the circumstance that has been alleged by Plaintiff with regard to Treq and Lumen Networks, and therefore the basis for application of successor liability against those entities has been adequately pleaded. What has not been adequately pleaded, however, is which exception is applicable to Sonus Networks. Plaintiff alleges, in wholly conclusory fashion, that the liabilities of Treq were “assumed by Sonus Networks” (FAC, ¶ 32), but does not articulate how this occurred, i.e., by express or implied agreement, consolidation, or merger. (See Ray v. Alad Corp., supra, 19 Cal.3d at 28.) Absent such allegations, application of successor liability against Sonus Networks for Vello Systems’ conduct in connection with the unpaid invoices has not been pleaded and therefore Sonus Networks’ demurrer to the first, second, third, and fourth causes of action on the ground of failure to state facts sufficient to constitute a cause of action is SUSTAINED WITH 10 DAYS’ LEAVE TO AMEND.

Sonus Networks’ special demurrer to the apparent unjust enrichment cause of action, i.e., the fifth cause of action, which is listed on the title page of the FAC but not specifically pleaded within the complaint itself, is SUSTAINED WITHOUT LEAVE TO AMEND. In its opposition, Plaintiff acknowledges that it mistakenly listed an unjust enrichment cause of action on the title page and that its intention was not to plead such a claim against Sonus Networks.

Sonus Networks’ motion to strike Plaintiff’s request for punitive damages is GRANTED WITH 10 DAYS’ LEAVE TO AMEND. Because Plaintiff has failed to plead a basis for liability against Sonus Networks for the reasons set forth above, it follows that Plaintiff has not pleaded an entitlement to punitive damages.

Treq and Lumen Networks’ Motions

Treq and Lumen Networks’ demurrer is substantively largely the same as Sonus Networks’ demurrer but for the reasons touched upon above in discussing that motion, the arguments that it asserts relative to the application of successor liability to those entities are not as persuasive. That is, Plaintiff has effectively pleaded that Treq and Lumen Networks were merely continuations of Vello Systems that were created to enable May to fraudulently avoid payment of the debts incurred by that entity. Consequently, Plaintiff has stated claims against Treq and Lumen Networks based on successor liability. (See Ray v. Alad Corp., supra, 19 Cal.3d at 28.) Accordingly, Treq and Lumen Networks’ demurrer to the first, second, third and fourth causes of action on the ground of failure to state facts sufficient to constitute a cause of action is OVERRULED.

Treq and Lumen Networks’ special demurrer to the unjust enrichment cause of action is SUSTAINED WITHOUT LEAVE TO AMEND, as it was not Plaintiff’s intention to plead such a claim against these defendants.

Finally, Treq and Lumen Networks’ motion to strike Plaintiff’s request for punitive damages is DENIED. Plaintiff has pleaded a sufficient basis for the imposition of punitive damages in alleging that Treq and Lumen Networks were formed and utilized as part of a fraudulent scheme to deprive Plaintiff of the monies owed to it by Vello Systems.