Case Name: Rajkumar Potuneedi v. Venkat Rayapati, et al.
Case No: 16CV301420

I. Background

Plaintiff Rajkumar Potuneedi (“Plaintiff”) brings this action against defendants Venkat Rayapati, Vijayasri Rayapati, SAI Technology (“SAI”), Cyber Forza, Inc., Subramanyan Rayapati, Camillo Martino (collectively, “Defendants”), and Robert Young for damages from fraud and breach of contract.

According to the allegations of the second amended complaint (“SAC”), Plaintiff and Defendants Venkat Rayapati and Vijayasri Rayapati met each other socially through a cousin of Plaintiff. (SAC, ¶¶ 10, 11.) Based on this relationship, Plaintiff was fraudulently induced to invest in Defendants’ business enterprise, SAI. (Id. at ¶¶ 60, 61.) Plaintiff initially loaned them $100,000 relying on detailed and elaborate representations about Defendants’ 3G/4G technology, big-name investors, and customer base including several large companies. (Id. at ¶¶ 40, 57, 61.) Plaintiff subsequently loaned Defendants an additional $25,000 and agreed to a modification of the original loan terms to allow for repayment in five years. (Id. at ¶ 66.) Plaintiff was told that because of his investments “Cisco” was going to value the technology at $350 million. (Id. at ¶ 72.)

Thereafter, SAI’s head of Human Resources offered Plaintiff a job with the company in exchange for further modification of the loan terms including that it would be due in five years rather than a few days as originally promised. (SAC, ¶¶7 3, 77.) Plaintiff asked if the agreement should be in writing, and the HR manager said it was not necessary as they were all from the same caste and had known each other for four years. (Id. at ¶ 75.)

In April 2016 Defendants changed the company’s website to focus on its cloud technology rather than its 3G/4G technology, contradicting the representations that induced Plaintiff to invest. (SAC, ¶ 82.) Plaintiff demanded timely pay back of the loan, and Defendants refused. (Id. at ¶¶ 85, 86.) It was at that time that Plaintiff learned of the fraud, and that Defendants had used the loans to purchase jewelry and furniture to present a false image of success, rather than to invest in their business. (Id. at ¶ 88.)

As a result of the foregoing, Plaintiff filed the SAC alleging causes of action for: (1) intentional misrepresentation – fraud; (2) breach of contract; (3) concealment; and (4) false promise – fraud.

Presently before the court is Defendants’ demurrer.

II. Meet and Confer

Preliminarily, Plaintiff takes issue with the sufficiency of Defendants’ efforts at meet and confer, and asks that the demurrer be summarily denied on this basis.

Pursuant to section 430.41, subdivision (a), prior to filing a demurrer, the moving party shall meet and confer with the party who filed the pleading to determine whether an agreement can be reached that would resolve the objections raised by the demurrer. During the meet and confer process, “the demurring party shall identify all of the specific causes of action that it believes are subject to demurrer and identify with legal support the basis of the deficiencies.” (§ 430.41, subd. (a)(1).) The party who filed the pleading shall, in turn, provide legal support for his or her position that it is legally sufficient. (Ibid.)

Furthermore, the demurring party shall file and serve with the demurrer a declaration stating the means by which they met and conferred with the party who filed the pleading, and that the parties did not reach an agreement, or that the opposing party failed to respond to the meet and confer requests. (§ 430.41, subd. (a)(3)(A-B). However, any determination by the court that the meet and confer process was insufficient shall not be grounds to overrule or sustain a demurrer. (§ 430.41, subd. (a)(4).)

Here, Defendants’ counsel filed a meet and confer declaration with the moving papers. He indicates that initial attempts at meet and confer were made a few days before the original demurrer deadline when he sent two emails and a meet and confer letter, filed with his declaration. (Dec. of M. Metzger, ¶¶ 2, 3, 4, 5.) The meet and confer letter is detailed, identifies causes of action he believes are subject to a demurrer with citations to law, and it invites Plaintiff’s counsel to meet and confer “as soon as possible.” (Id. at Exhibit A.) However, Plaintiff’s counsel was unavailable, therefore Defendants’ counsel “invoked” section 430.41, subdivision (a)(2) which grants a 30-day extension to file responsive pleading if the parties are not able to meet and confer at least five days prior to the date the responsive pleading is due. (Id. at ¶ 7.) Thereafter, he sent another letter to Plaintiff’s counsel on September 26, 2019, about a week before he intended to file the demurrer, indicating he had not received a response regarding the original letter and inviting further discussion. (Id. at Exhibit B.)

At the same time, counsel for Plaintiff submits a declaration indicating she did not “see” the email regarding “meet and confer” until “this evening,” in apparent reference to the day the declaration was signed on November 5, 2019. (Dec. of C. Kelly, ¶ 5.) She states she saw the email after leaving a voice mail for Defendants’ counsel, and she wanted to be sure he saw it so she “searched his email address and saw and read his email… for the first time.” (Id. at ¶ 5.) She also states that “telephone and voice mail is the best way to contact me” and that neither she nor her co-counsel received a phone call from Plaintiff’s counsel. (Id. at ¶¶ 3, 4.)

Consequently, aside from Defendants’ counsel’s problematic timing issues, it appears his efforts to attempt to meet and confer were adequate. By her own admission, counsel for Plaintiff lacked diligence in attending to correspondences from other counsel, and simply did not respond to the meet and confer attempts by Defendants and did not even see them until November 5. As a result, she cannot complain of deficiencies in meet and confer, when she did not respond at all to the efforts that were made.

III. Demurrer

Defendants demur to all four causes of action on the ground of failure to state sufficient facts pursuant to Code of Civil Procedure section 430.10, subdivision (e).

A. Legal Standard

A demurrer tests the legal sufficiency of a pleading, but not the truth of a plaintiff’s allegations or the accuracy with which he or she describes the defendant’s conduct. (Align Technology, Inc. v. Tran (2009) 179 Cal.App.4th 949, 958; citing Committee on Children’s Television Inc. v. General Foods Corp. (1983) 35 Cal.3d 197, 213.) The demurrer is treated as admitting all material facts, properly pleaded, but not contentions, deductions or conclusions of law. (Ibid.)

B. Contract Claim

Defendants argue that the second cause of action for breach of contract fails on the basis of the Statute of Frauds and the sham pleading doctrine.

1. Statute of Frauds

The Statute of Frauds is a collective term describing the various statutory provisions that deny enforcement to certain enumerated classes of contracts unless they are reduced to writing and signed by the party to be charged.” (1 Witkin, Summary of California Law (11th ed. 2017) Contracts, § 343.) As relevant here, one type of contract subject to the statute of frauds is “[a]n agreement that by its terms is not to be performed within a year from the making thereof.” (Civ. Code, § 1624, subd. (a)(1); see Munoz v. Kaiser Steel Corp. (1984) 156 Cal.App.3d 965, 971.)

As Defendants assert, the contract at issue is alleged to have been five years in duration and thus, by its terms, was not to be performed within a year of its making. (SAC, ¶ 77.) Accordingly, on its face the agreement falls within the statute of frauds. Moreover, Plaintiff alleges that the agreement was oral. (Id. at ¶¶ 74, 75.) Therefore, the Statute of Frauds bars enforcement of the contract unless an exception applies.

In reply, Plaintiff argues that an allegation of inducement through fraud is an exception to the Statute of Frauds. An action for fraud may be maintained even where the allegedly fraudulent promise would be unenforceable due the Statute of Frauds. (Tenzer v. Superscope, Inc. (1985) 39 Cal.3d 18, 29-31 [the statute of frauds, having been enacted for the purpose of preventing fraud, shall not be made the instrument of shielding, protecting or aiding the party who relies upon it in the perpetration of a fraud or in the consummation of a fraudulent scheme].) Here, Plaintiff alleges fraudulent inducement in contract formation. Thus, Defendants cannot rely on the Statute of Frauds as a defense and the demurrer cannot be sustained on this basis.

2. Sham Pleading Doctrine

Defendants argue that the sham pleading doctrine precludes the breach of contract cause of action because Plaintiff previously abandoned it after the demurrer to the original complaint was sustained.

Under the sham pleading doctrine, plaintiffs are precluded from amending complaints to omit harmful allegations, without explanation, from previous complaints to avoid attacks raised in demurrers. (Deveny v. Entropin (2006) 139 Cal.App.4th 408, 426.)

Here, Defendants ostensibly complain of Plaintiff’s addition of a cause of action under the sham pleading doctrine, and further argue that it was abandoned. This is not a correct application of the sham pleading doctrine which precludes omission of harmful allegations, not the addition of new causes of action. Furthermore, the face of the pleading would not show this defect, and since there is no request for judicial notice before the court, the prior pleadings cannot be considered.

Furthermore, Defendants arguments regarding abandonment are not persuasive, and misconstrue the cited case law. For example, Stansfield v. Starkley (1990) 220 Cal.App.3d 59, 76, held that an appellate court cannot consider allegations of a superseded complaint when reviewing the sustaining of a demurrer of the new, amended complaint. That is not relevant here as an argument regarding abandonment, or to the sham pleading doctrine.

Therefore, the demurrer to the second cause of action is OVERRULED.
C. Fraud Claims

Defendants demur to the first, third and fourth causes of action on the basis of the statute of limitations, on the basis that causation is not shown, and also on the basis that fraud is not alleged with requisite specificity against certain defendants.

1. Statute of Limitations

Defendants argue that the fraud claims are barred by the statute of limitations and the SAC does not sufficiently allege delayed discovery.

To sustain a demurrer on the basis of the statute of limitations, the defect must clearly and affirmatively appear on the face of the complaint; it is not enough that the complaint shows merely that the action may be barred. (E-Fab., Inc. v. Accountants, Inc. Services (2007) 153 Cal.App.4th 1308, 1317.) “In assessing whether claims are time-barred, two basic questions drive [the] analysis: (a) [w]hat statutes of limitations govern the plaintiff’s claims? (b) [w]hen did the plaintiff’s causes of action accrue?” (Id. at 1316.) Generally speaking, a cause of action accrues at the time when the cause of action is complete with all its elements. (Id. at 1317.)

The statute of limitations for fraud is three years. (Code Civ. Proc., § 338, subd. (d).) By its nature, fraud may not be immediately apparent to a plaintiff but the facts must allege delayed discovery. (E-Fab., Inc. v. Accountants, Inc. Services, supra, 153 Cal.App.4th 1308, 1318; Code Civ. Proc., § 338, subd. (d).) The discovery rule “postpones accrual of a cause of action until the plaintiff discovers, or has reason to discover, the cause of action.” (Ibid.) A plaintiff must plead facts to show both the time and manner of discovery and the inability to have made earlier discovery despite reasonable diligence, and conclusory allegations will not withstand the demurrer. (Id. at 1320.)

Plaintiff alleges three causes of action for various forms of fraud. (See Lazar v. Superior Court (1996) 12 Cal.4th 631, 638 [promissory fraud is a subspecies of the action for fraud and deceit].) Thus, the three year limit applies to all three causes of action.

The SAC primarily alleges incidents that occurred in 2011, including Defendants’ alleged presentation to Plaintiff, as well as the two loans that he made. (SAC, ¶¶ 16, 61, 66.) Given that the action was first filed in October of 2016, the question becomes whether Plaintiff has sufficiently alleged delayed discovery and later accrual. Plaintiff alleges that in 2016 a change in the company’s focus, as represented by its website triggered him to call other investors and thereupon he “discovered that the majority of what [he] had been told to secure his money and work was in fact false, and [he] began to suspect fraud…” (Id. at ¶¶ 82, 83, 84.) Therefore, the time and manner of discovery is alleged.

However, the SAC is devoid of facts to support any reasonable diligence or inability to have discovered the fraud sooner. The SAC merely alleges that Plaintiff invested money in 2011 based on false representations and that he was not aware that the representations were fraudulent until he saw a change in Defendants’ website in 2016. However, Plaintiff does not allege why he didn’t or was otherwise unable to engage in efforts to examine the truth or falsity of these representations sooner than 2016, so reasonable diligence is not alleged, nor are there facts to support why he was unable to have discovered the fraud sooner. Delayed discovery is therefore insufficiently pleaded.

As a result, the demurrer to the first, third and fourth causes of action will be sustained on the basis of the statute of limitations.

2. Sufficiency of Pleading of Causation to Allege Fraud

Defendants argue that because Plaintiff would have suffered an injury regardless of the fraud, he cannot allege causation.

A plaintiff alleging fraud must plead facts to show that his or her damages were caused by the actions he took in reliance on the defendant’s misrepresentations. (Beckwith v. Dahl (2012) 205 Cal.App.4th 1039, 1064.) Where the plaintiff would have suffered the alleged damage even in the absence of the fraudulent inducement, causation cannot be alleged (Ibid, citing Building Permit Consultants, Inc. v. Mazur (2004) 122 Cal.App.4th 1400, 1414.)

Plaintiff alleges he was fraudulently induced into a loan agreement with Defendants. Therefore, the injury he sustained was a result of being induced by fraud. Unlike the cases where causation has not been found, as alleged the fraud here was the reason for the injury, so causation is sufficiently pleaded.

Therefore, the demurrer will not be sustained on this basis.

3. Liability of Cyber Forza

Defendant Cyber Forza argues that the allegations against it are deficient as it cannot be liable as a matter of law as alter ego has not been alleged.

However, this argument is stated with reference only to allegations, and without legal authority for how the alter ego doctrine would or would not apply as pleaded in the SAC. Consequently, the demurrer cannot be sustained on this basis.

4. Sufficiency of Pleading as to Individual Defendants

Defendants Cyber Forza, Camillo Martino and Subramanyan Rayapati demur on the basis that the fraud allegations as to them lack requisite specificity.

Indeed, fraud must be pleaded specifically, and “general and conclusory allegations do not suffice.” (Alfaro v. Community Housing Improvement System & Planning Assn., Inc. (2009) 171 Cal.App.4th 1356, 1384, citations omitted.) This necessitates pleading facts which show “how, when, where, to whom, and by what means the representations were tendered.” (Ibid.) However, where concealment is alleged, less specificity is required as the defendant is likely to possess superior knowledge and “how does one show how by what means something didn’t happen, or when it never happened, or where it never happened?” (Ibid.)

Here, Defendants argue that the “how, when, to whom, and by what means” requirement of the pleading is missing from the allegations as to Cyber Forza, Martino and Subramanyam Rayapati. However, the third cause of action alleges concealment therefore the specificity requirement does not apply and the demurrer to the third cause of action on this basis cannot be sustained.

As to Cyber Forza’s demurrer to the first, third and fourth causes of action, it argues that where fraud is alleged as to a corporate defendant, plaintiffs must identify among other things, the names of the persons who made the fraudulent representations, and their authority to speak. (Tarmann v. State Farm Mut. Auto. Ins. Co. (1991) 2 Cal.App.4th 153, 157.) While general allegations of “authority” are pleaded (SAC, ¶¶ 4, 5, 6, 7.) none of these are specifically connected to the authority of those who allegedly made fraudulent representations in 2011, to speak on behalf of Cyber Forza. As Cyber Forza argues, as alleged, it was formed in 2018. (Id. at ¶ 3.) Thus, merely saying that “defendant acted as an authorized agent, employee or representative of each other defendant” does not meet the specificity requirement to allege fraud against Cyber Forza, and the demurrer to the first, third and fourth causes of action as to it will be sustained on this basis.

As to Subramanyam Rayapati’s demurrer to the fraud claims, it is argued that the allegations against him are also conclusory. This point is well taken. It is merely alleged that he “regularly told Plaintiff that his money was safe and guaranteed” and that “SAI was a safe investment.” (SAC, ¶ 6.) It goes on to allege that he “was aware of the false claims purported on SAI’s and Cyberforza’s website.” (Ibid.) These allegations are entirely conclusory, and are devoid of facts to support that Subramanyam Rayapati himself perpetrated fraud against Plaintiff. Therefore, Subramanyam Rayapati’s demurrer to the first, third and fourth causes of action will be sustained.

Likewise, Camillo Martino is referenced in only one section of the SAC. (SAC, ¶ 7.) In that section, his connections to SAI and Cyber Forza are alleged. (Ibid.) It is then alleged that he “profited off the fraud upon Plaintiff” and was “aware of the false claims.” (Ibid.) His name is not subsequently mentioned in the allegations regarding the fraud and representations made in 2011, and his mere connection to the corporate defendants is not enough to impute the allegations of fraud against him with sufficient specificity. Therefore, Camillo Martino’s demurrer to the first, third and fourth cause of action will be sustained.

5. Conclusion

As a result of the foregoing, Defendants’ demurrer to the first, third and fourth causes of action is SUSTAINED with 10 days leave to amend on the basis of the statute of limitations.

Cyber Forza’s demurrer to the first, third and fourth causes of action is SUSTAINED, with 10 days leave to amend, on the basis that the fraud claims are not sufficiently pleaded as to it.

Subramanyam Rayapati’s demurrer to the first, third and fourth causes of action is SUSTAINED, with 10 days leave to amend, on the basis that the fraud claims are not sufficiently pleaded as to him.

Camillo Martino’s demurrer to the first, third and fourth causes of action is SUSTAINED, with 10 days leave to amend, on the basis that the fraud claims are not sufficiently pleaded as to him.