16CV302986

Robert Sommer et al vs Celebuddy, Inc. et al

Plaintiffs/cross-defendants Robert Sommer and William Sommer (“Cross-Defendants”) demur to the Amended Cross-Complaint (“ACC”) filed by defendants/cross-complainants Celebuddy, Inc. (“Celebuddy”) and John Tran (“Tran”) (collectively, “Cross-Complainants”).

I. Background
II.

A. Factual
B.

This action arises out of a commercial lease dispute. According to the allegations of the underlying complaint (the “Complaint”), pursuant to a written agreement dated July 16, 2015 (the “Lease”), Cross-Defendants leased a commercial real property located at 1566 South 7th Street in San Jose (the “Premises”) to Celebuddy for the purpose of operating a medical cannabis facility. (Complaint, ¶¶ 1, 4, Exhibits A and B.) Tran, the President of Celebuddy, signed a written Guaranty of the Lease on August 27, 2015 (the “Guaranty”). (Id., ¶ 5, Exhibit C.)

On September 20, 2016, Cross-Defendants served Celebuddy with a written Notice of Taking Ownership of Improvements pursuant to the Lease, taking ownership of all alterations and utility installations on the Premises. (Complaint, ¶¶ 7, 8; Exhibit D.) Following service, Cross-Complainants wrongfully removed the foregoing items from the Premises, causing damage in the process. (Id., ¶ 9.) Despite a request that they cease and desist, Cross-Complainants affirmatively stated that they intended to continue to remove Cross-Defendants’ property from the Premises, including the HVAC and electrical utility systems. (Id., ¶ 10.)

Based on the foregoing allegations, Cross-Defendants filed the Complaint on November 21, 2016, asserting the following causes of action: (1) breach of contract (Lease) (against Celebuddy); (2) breach of contract (Guaranty) (against Tran); (3) waste (against Cross-Complainants); and (4) conversion (against Cross-Complainants).

A cross-action was initiated by Cross-Complainants on December 29, 2016. According Cross-Complainants’ allegations, the City of San Jose (the “City”) required Medical Cannabis Facilities to submit a Zoning Verification Certificate by July 17, 2015. (ACC, ¶ 9.) In order to obtain such a certificate, Cross-Complainants needed a signed lease and/or authorization letter from their prospective landlord; this is why the Lease was signed on July 16, 2015. (Id.)

At the time of negotiation of the Lease, Cross-Complainants informed Cross-Defendants that the City had set a strict deadline for compliance with its Medical Cannabis Facilities registration process, which required that certain actions be completed by December 18, 2015. (ACC, ¶ 12.) Cross-Complainants were concerned with the short timeline and reluctant to enter into the Lease unless they could occupy the space at an earlier date than specified therein. (ACC, ¶ 14.) Cross-Defendants advised them that they could begin occupation of the Premises on October 1, 2015, in order to start construction give the City’s strict timeline. (Id., ¶ 15.) However, the prior tenant was unable to vacate the space and Cross-Defendants unable to deliver the space for occupation by that date as agreed. (Id., ¶ 16.)

Ultimately, through no fault of their own, Cross-Complainants were unable to complete construction prior to the aforementioned deadline, resulting in their disqualification from the Medical Cannabis Facilities registration process. (ACC, ¶ 17.) Unable to operate a medical cannabis facility without risking prosecution, Cross-Complainants requested to terminate the Lease due to impossibility/impracticability and frustration of purpose but were told by Cross-Defendants that they would be held liable for the remaining five year term of the Lease. (Id., ¶ 19.)

In January 2016, Cross-Complainants began looking for a registered Medical Cannabis Facility to occupy the Premises as a sub-tenant subject to Cross-Defendants’ approval as stipulated in the Lease. (ACC, ¶ 22.) At this same time, the deadline for construction pursuant to the Lease addendum became an issue in that if Cross-Defendants did not finish certain construction work on the premises, they would owe three months rent. (Id.) The parties agreed that Cross-Defendants could retain Cross-Complainants’ deposit in satisfaction of their inability to me the aforementioned deadline, thereby allowing the latter to continue to pursue potential subtenants. (Id.) Cross-Complainants allege that despite their representations, Cross-Defendants never had any intention of honoring the Lease terms that permitted a subtenant. (Id., ¶ 23.)

Cross-Complainants successfully made contact with White Fire and Elemental Wellness, prospective subtenants, and began negotiations with each. (ACC, ¶¶ 25-28.) During this time, Cross-Defendants began making demands outside of the Lease by requesting an increase in the security deposit and receipts for tenant improvements, as well as making demands relating to Cross-Complainants’ potential agreement with White Fire. (Id., ¶¶ 29, 30.) On September 19, 2016, Cross-Defendants sent Cross-Complainants a ten-day notice to pay or quit. (Id., ¶ 31.) Cross-Complainants allege on information and belief that the notice was sent in retaliation for their not being in agreement with Cross-Defendants’ demands. (Id.)

Cross-Defendants subsequently sent Cross-Complainants an email stating that they were taking ownership of all of the latter’s equipment, improvements, HVAC, air scrubbers and grow light fixtures pursuant to the Lease. (ACC, ¶ 34.) Cross-Complainants allege that Cross-Defendants’ efforts to take the foregoing items, which they assert qualified as “trade fixtures” under the Lease that were distinct from alterations and utility installations, was an attempt to circumvent payments to Cross-Complainants by White Fire. (Id., ¶ 35.) They further allege that Cross-Defendants unreasonably withheld consent to the assignment of the Lease for their own personal gain. (Id., ¶ 39.)

C. Procedural
D.

Based on the foregoing allegations, Cross-Complainants filed the Cross-Complaint on December 29, 2016, asserting the following causes of action: (1) fraud; (2) fraud and deceit by negligent misrepresentation; (3) fraud and deceit by suppression of facts; (4) unjust enrichment; (5) intentional interference with prospective economic advantage; (6) negligent interference with prospective economic advantage; (7) breach of implied covenant of good faith and fair dealing; (8) breach of contract; (9) tortious interference with a contract; and (10) declaratory relief. Cross-Defendants subsequently filed a motion for judgment on the pleadings as to each of the foregoing claims on the ground of failure to state facts sufficient to constitute a cause of action. On June 18, 2019, the Court granted the motion with leave to amend as to the first, second, third, fifth, sixth and tenth causes of action, and without leave to amend as to all of the remaining claims.

On July 1, 2019, Cross-Complainants filed the ACC, asserting the following causes of action: (1) fraud and deceit by intentional misrepresentation; (2) fraud and deceit by negligent misrepresentation; (3) fraud and deceit by suppression of facts; (4) intentional interference with prospective economic advantage; (5) negligent interference with prospective economic advantage; and (6) declaratory. On August 22, 2019, Cross-Defendants filed the instant demurrer to the ACC and each of the causes of action asserted therein on the ground of failure to state facts sufficient to constitute a cause of action. (Code Civ. Proc., § 430.10, subd. (e).) Cross-Complainants oppose the motion.

III. Cross-Defendants’ Request for Judicial Notice
IV.

In support of their motion for judgment on the pleadings, Cross-Defendants request that the Court take judicial notice of the following items: (1) the Complaint in this action (Exhibit 1); (2) Cross-Complainants’ Answer to the Complaint, filed December 29, 2016 (Exhibit 2); (3) the Cross-Complaint and all exhibits attached thereto (Exhibit 3); (4) Cross-Defendants’ Complaint for Unlawful Detainer, Case No. 16CV302985, entitled Sommer, et al. v. Celebuddy, Inc., filed November 21, 2016 (the “UD Action”) (Exhibit 4); (5) Cross-Defendants’ Request for Entry of Default in the UD Action, filed December 2, 2016 (Exhibit 5); (6) the Clerk’s Judgment entered in the UD Action on December 9, 2016 granting Cross-Defendants’ possession of the Premises (Exhibit 6); and (7) the ACC, filed on July 1, 2019 (Exhibit 7). As these materials are court records, they are proper subjects of judicial notice pursuant to Evidence Code section 452, subdivision (d). Consequently, Cross-Defendants’ request for judicial notice is GRANTED.

V. Cross-Defendants’ Demurrer
VI.

A. Timeliness
B.

As a preliminary matter, the Court notes that Cross-Complainants have filed an extremely untimely opposition in violation of Code of Civil Procedure section 1005, subdivision (b), which provides that all opposing papers must be filed and served at least nine court days before the hearing. No paper may be rejected for filing on the ground that it was untimely submitted for filing. (California Rules of Court, rule 3.1300(d).) If the court, in its discretion, refuses to consider a late filed paper, the minutes or order must indicate. (Id.)

Here, the hearing on Cross-Defendants’ demurrer to the ACC is scheduled for November 19, 2019. Thus, in order to be considered timely Cross-Complainants’ opposition needed to be filed by November 6, 2019. However, it was not filed until a full week later on November 13, 2019. No explanation has been provided for Cross-Complainants’ tardiness. Nevertheless, in the interests of judicial economy, the Court in its discretion will consider the substance of the opposition. Cross-Defendants are admonished to comply with all applicable deadlines in the future.

C. Substantive Merits
D.

1. Fraud Claims (1st , 2nd and 3rd Causes of Action)
2.

In the first, second and third causes of action for various species of fraud, Cross-Complainants incorporate all of the preceding allegations, and generally allege that “every representation” made by Cross-Defendants was false and was made with the intent to deceive and defraud them. (ACC, ¶¶ 44-47.) They further allege that they actually and justifiably relied on said representations to their detriment. (Id., ¶ 48.)

As the Court explained in its preceding order, the elements of a claim for fraud are: (1) misrepresentation (false representation, concealment, or nondisclosure); (2) knowledge of falsity (or ‘scienter’); (3) intent to defraud, i.e., to induce reliance; (4) justifiable reliance; and (5) resulting damage.” (Lazar v. Superior Court (1996) 12 Cal.4th 631, 638 (Lazar).) “Fraud actions are subject to strict requirements of particularity in pleading. … Accordingly, the rule is everywhere followed that fraud must be specifically pleaded.” (Committee on Children’s Television, Inc. v. General Foods Corp. (1983) 35 Cal.3d 197, 216.) “The pleading should be sufficient to enable the court to determine whether, on the facts pleaded, there is any foundation, prima facie at least, for the charge of fraud.” (Commonwealth Mortgage Assurance Co. v. Superior Court (1989) 211 Cal.App.3d 508, 518.) The particularity requirement necessitates “pleading facts which ‘show how, when, where, to whom, and by what means the representations were tendered.’” (Lazar, supra, 12 Cal.4th at 645.)

The Court previously granted Cross-Defendants’ motion for judgment on the pleadings as to the fraud claims asserted in the original cross-complaint on the ground that Cross-Complainants had failed to plead those claims with the requisite specificity. Cross-Defendants acknowledge that Cross-Complainants have added additional allegations to their ACC as they relate to their fraud claims, but maintain that these causes of action are still defective because the allegations directly contradict the terms of the Lease, which is an exhibit to the ACC.

Cross-Defendants explain that the only alleged misrepresentation which has been specifically pleaded by Cross-Complainants as required by general fraud pleading standards is that they purportedly communicated to Cross-Complainants that that they could begin construction on October 1, 2015. Cross-Defendants explain that this is contradicted by the Lease term which provided that Cross-Complainants could not assume possession of the Premises until November 1, 2015, and further by the Addendum to the Lease, dated July 16, 2015, which stated that: “[t]he Existing Lease terminates on November 1, 2015 (the “Current Lease Termination Date”). Construction of the alterations and improvements contemplated by this Lease cannot begin until the Current Lease Termination Date.” (Complaint, ¶ 4, Exhibit B at ¶ 1.3.) The provision explained that if the Premises were vacated early, the Lessee could occupy the Premises early. (Id. at ¶ 57(B).) Cross-Defendants continue that Cross-Complainants own exhibit to the ACC undercuts their claim that they relied on Cross-Defendants’ purported statement because it reveals that Cross-Complainants had made arrangements for early occupancy directly with the current lessee, American Scissor Lift, not with Cross-Complainants, and that those arrangements fell through because of the unavailability of American Scissor Lift’s subcontractor, not because of any actions by Cross-Defendants. (ACC, Exhibit 1.)

Indeed, the terms of the Lease were unambiguous with regard to when Cross-Complainants were permitted to begin construction by clearly setting forth, in two separate places (the Lease and the Addendum to the Lease), when they could take possession of the Premises. Critically, “to the extent that factual allegations conflict with the content of exhibits to [a] complaint,” courts “rely on and accept as true the contents of the exhibits and treat as surplusage the pleader’s allegations” as to the effect of those exhibits. (Barnett v. Fireman’s Fund Ins. Co. (2001) 90 Cal.App.4th 500, 505.) Even if Cross-Complainants’ allegations regarding Cross-Defendants’ purported misrepresentation could be accepted as true, the presence of the foregoing terms, as Cross-Defendants maintain, defeats any allegation of justifiable reliance by Cross-Complainants. The question of whether reliance is justifiable is one of fact but can be decided as a matter of law “if reasonable minds can come to only one conclusion based on the facts.” (Guido v. Koopman (1991) 1 Cal.App.4th 837, 843-844.) Because these dates were clear and unambiguous, Cross-Complainants cannot establish justifiable reliance on alleged representations made by Cross-Defendants regarding early possession.

Cross-Defendants also persuasively argue that the ACC fails to allege any actual concealment of any facts by them or any duty of disclose. A necessary element of a claim for fraud based on concealment or suppression of facts is that the defendant had a duty to disclose the concealed or suppressed facts to the plaintiff. (Jones v. ConocoPhillips (2011) 198 Cal.App.4th 1187, 1198.) “A failure to disclose a fact can constitute actionable fraud or deceit in four circumstances: (1) when the defendant is the plaintiff’s fiduciary; (2) when the defendant has exclusive knowledge of material facts not known or reasonably accessible to the plaintiff; (3) when the defendant actively conceals a material fact from the plaintiff; and (4) when the defendant makes partial representations that are misleading because some other material fact has not been disclosed.” (Collins v. eMachines, Inc. (2011) 202 Cal.App.4th 249, 255.) Here, none of the foregoing circumstances have been pleaded in the ACC. Given these failings, Cross-Complainants’ fraud claim based on suppression of facts is defective.

In their opposition, Cross-Complainants do not specifically address Cross-Defendants’ arguments regarding the alleged misrepresentation of when they could begin construction on the Premises, thereby impliedly conceding the merits of those arguments. Instead, they focus on an entirely different alleged “misrepresentation” purportedly made by Cross-Defendants regarding the disposition of Celebuddy’s trade fixtures. But no misrepresentation regarding trade fixtures is actually pleaded in the ACC; instead, Cross-Defendants appear to be accusing Cross-Defendants of breaching the Lease by attempting to take possession of their trade fixtures. (See ACC, ¶¶ 34-38.) Cross-Defendants further argue that various terms in the Lease concerning the trade fixtures are ambiguous and that this action arises out of a dispute over the interpretation of these terms. Even if this is the case, Cross-Complainants no longer have a claim for breach of contract in the ACC such that contract interpretation would be a relevant issue. It is not otherwise clear to the Court how a dispute over the meaning of various provisions in the Lease relates to any misrepresentations purportedly made by Cross-Defendants based on what is currently pleaded in the ACC.

Cross-Complainants also do not explain what facts were suppressed and/or concealed by Cross-Defendants, or demonstrate that a duty to disclose was owed to them.

Given the foregoing, the Court finds that Cross-Complainants have failed to state any claim for fraud. Consequently, Cross-Defendants’ demurrer to the first, second and third causes of action on the ground of failure to state facts sufficient to constitute a cause of action is SUSTAINED WITHOUT LEAVE TO AMEND.

3. Intentional Interference with Prospective Economic Advantage (4th Cause of Action)
4.

The fourth cause of action is predicated on allegations that Cross-Defendants’ intentionally acted to disrupt Cross-Complainants’ prospective economic relationships with the various potential subtenants. (ACC, ¶¶ 65-68.)

The elements of a claim for intentional interference with prospective economic advantage are (1) an economic relationship between the plaintiff and some third party, with the probability of future economic benefit to the plaintiff; (2) the defendant’s knowledge of the relationship; (3) intentional acts on the part of the defendant designed to disrupt the relationship; (4) actual disruption of the relationship; and (5) economic harm to the plaintiff proximately caused by the acts of the defendant. (Korea Supply Co. v. Lockheed Martin Corp. (2003) 29 Cal.4th 1134, 1153.) Critically, “[a] plaintiff must also show that the defendant’s conduct was independently unlawful, that is, proscribed by some constitutional, statutory, regulatory, common law, or other determinable legal standard.” (Winchester Mystery House, LLC v. Global Asylum, Inc. (2012) 210 Cal.App.4th 579, 596.) Stated alternatively, the plaintiff must plead that the defendant’s interference was wrongful “by some measure beyond the fact of the interference itself.” (Della Penna v. Toyota Motor Sales, U.S.A. (1995) 11 Cal.4th 376, 392-393.) Cross-Defendants assert that Cross-Complainants have still failed to plead independently wrongful conduct on their part, which was the basis of the Court previously granted Cross-Defendants’ motion for judgment on the pleadings as to this claim in the original cross-complaint.

Cross-Complainants maintain, as they did in their opposition to the preceding motion, that it is Cross-Defendants’ refusal to consent to the proposed assignment of the Lease that was the purportedly wrongful conduct. As Cross-Defendants maintain, there are several problems with this theory, which the Court articulated previously. First, if it is Cross-Complainants’ contention that Cross-Defendants’ refusal violated the Lease, such conduct would merely be a breach of contract and therefore insufficient to support the “wrongful” component of the claim. (See Korea Supply Co., supra, 29 Cal.4th at 1158-1159 [in order to qualify as “independently wrongful,” act must be based on “some constitutional, statutory, regulatory, common law or other determinable legal standard”.)

Second, Section 12.1(f) of the Lease provides, in pertinent part, that the Lessor “may reasonably withhold consent to a proposed assignment or subletting if Lessee is in Default at the time consent is requested.” (Complaint, ¶ 4, Exhibit B.) As per the documents which the Court has taken judicial notice of, Cross-Defendants obtained a default judgment against Celebuddy in the UD Action. This judgment has a collateral estoppel effect of establishing that Cross-Defendants were in default of the Lease by failing to pay rent due through November 2016. (See Martin v. General Finance Co. (1966) 239 Cal.App.2d 438 [stating that a default judgment may be as conclusive as if judgment had been rendered after trial, and because it is res judicata as to all issues pleaded in the complaint, the defendant is estopped from denying any of the allegations in the complaint in a subsequent action]; see also Needelman v. DeWolf Realty Co., Inc. (2015) 239 Cal.App.4th 750, 759 [judgment in unlawful detainer has res judicata on issues necessary litigated in order to determine right of possession].) Consequently, Cross-Defendants were not obligated to consent to any proposed assignment of the Lease by Cross-Complainants.

Third there is no allegation that Cross-Complainants ever presented Cross-Defendants with an assignment agreement with a potential assignee, let alone requested consent from Cross-Defendants, which they are required to do in writing under the terms of the Lease. (See Lease at ¶ 12.2(e) [“[e]ach request for consent to an assignment or subletting shall be in writing, accompanied by information relevant to Lessor’s determination as to the financial and operational responsibility and appropriateness of the proposed assignee or sublessee…”].)

Additionally, for the reasons set forth above, fraud has not been sufficiently pleaded and therefore cannot serve as the independently wrongful conduct that this cause of action requires.

Cross-Complainants do not specifically address the issue of their failure to plead independently wrongful conduct on the part of Cross-Defendants, instead arguing that most of the terms regarding a subtenant had been agreed to between the parties. Even if this is true, Cross-Complainants have not pleaded that they requested consent in writing as required. They additionally discuss the issue of their purported default of the lease and the alleged ulterior motivations of Cross-Defendant that were behind it. But Cross-Complainants’ default has already been adjudicated and the Court cannot and will not re-litigate the issue here. The proper place to do so was in the prior unlawful detainer action.

Because Cross-Complainants have failed to plead interfering conduct by Cross-Defendants that was wrongful “by some measure beyond the fact of the interference itself,” Cross-Defendants’ demurrer to the fourth cause of action on the ground of failure to state facts sufficient to constitute a cause of action is SUSTAINED WITHOUT LEAVE TO AMEND.

5. Negligent Interference with Prospective Economic Advantage (5th Cause of Action)
6.

The next claim is for negligent interference with prospective economic advantage and is predicated on allegations that Cross-Defendants acted negligently in relation to Cross-Complainants’ efforts to communicate with prospective subtenants by demanding payments and other things outside the terms of the Lease, and unreasonably withholding consent to a sublease.

This tort is established where a plaintiff demonstrates that “(1) an economic relationship existed between the plaintiff and a third party which contained a reasonably probable future economic benefit or advantage to plaintiff; (2) the defendant knew of the existence of the relationship and was aware or should have been aware that if it did not act with due care its actions would interfere with this relationship and cause plaintiff to lose in whole or in part the probable future economic benefit or advantage of the relationship; (3) the defendant was negligent; and (4) such negligence caused damage to plaintiff in that the relationship was actually interfered with or disrupted and plaintiff lost in whole or in part the economic benefits or advantage reasonably expected from the relationship.” (North American Chemical Co. v. Superior Court (1997) 59 Cal.App.4th 764, 786.) Cross-Defendants persuasively contend, as they did previously, that no claim has been stated for the same reason as the preceding claim, i.e., that Cross-Complainants have failed to plead that their alleged interference was wrongful independent of the interference itself. Cross-Defendants suggest that they cannot allege such independently wrongful conduct given Cross-Complainants’ own default, which expressly permitted Cross-Defendants to refuse to consent to assignment of the Lease. Given Cross-Complainants’ failure to plead such conduct as explained in the preceding claim, Cross-Defendants’ demurrer to the fifth cause of action on the ground of failure to state facts sufficient to constitute a cause of action is SUSTAINED WITHOUT LEAVE TO AMEND.

7. Declaratory Relief (6th Cause of Action)
8.

The final cause of action asserted in the Cross-Complaint is for declaratory relief, with Cross-Complainants requesting a declaration from the Court that the Lease has been frustrated and/or impossible to perform under the doctrine of frustration of purpose and impossibility because of the City’s zoning ordinance and Cross-Defendants’ alleged wrongful withholding of their consent of assignment of the Lease. (ACC, ¶ 77.) Cross-Complainants allege that they were “disqualified from acting under the ordinance for the specific performance for which the Premises were leased.” (Id.)

In demurring to this claim, Cross-Defendants persuasively argue that it is barred as a matter of law because the doctrine of frustration of purpose and impossibility is not applicable given that the event at issue (issuance of the permit by the City) was foreseeable and controllable by Cross-Complainants.

The common law defense of frustration of purpose arises from the occurrence of an event causing a failure of the consideration for the contract or a practically total destruction of the expected value of the performance. (Autry v. Republic Productions, Inc. (1947) 30 Cal.2d 144, 148.) To prevent the defense from interfering with the need for certainty, the defense is limited to cases of extreme hardship. (Lloyd v. Murphy (1944) 25 Cal.2d 48, 54.) Laws or other governmental acts that make performance unprofitable or more difficult or expensive do not excuse the duty to perform a contractual obligation. (Id. at 55.) The defense is also not available if the risk of the frustrating event was not reasonably foreseeable or controllable by the promisor. (Id.)

Here, the Court is in agreement with Cross-Defendants that the event that purportedly frustrated the Lease- their inability to obtain the necessary approval from the City- was foreseeable and controllable by Cross-Complainants. Cross-Complainants acknowledge as much in their opposition. Cross-Complainants were unable to use the Premises as intended because of their own failure to complete the construction to obtain a permit, or in the alternative to negotiate a more favorable lease which provided remedies for such an occurrence (e.g., making permit approval a condition of the Lease), not because the use itself became illegal.

Consequently, Cross-Defendants’ demurrer to the sixth cause of action on the ground of failure to state facts sufficient to constitute a cause of action is SUSTAINED WITHOUT LEAVE TO AMEND.