Case Name: Silicon Valley Wonderland, Inc., et al. v. Silicon Valley Harvest, et al.
Case No.: 2015-1-CV-284221

This is an action for fraud. According to the first amended complaint (“FAC”), in September 2012, Biyan Lisa Liu (“Liu”), Keh Shew Lu (“Lu”) and defendant Herbert Wu (“Wu”) entered into an oral joint venture agreement for a daycare business in which Lisa would be a 46% owner, Lu would be a 44% owner and Wu would be a 10% owner, and that Wu would be responsible for arranging the improvements to convert the existing space at the subject property so that it would be suitable for a daycare center. (See FAC, ¶ 10.) On September 12, 2012, Liu and Wu entered into a written contract with architect Susan Chen to design the improvements to convert the existing warehouse at the subject property to a daycare center of about 6,500 square feet, applying for a use permit, and preparing the supporting documentation, including parking, landscaping, and playground layouts, as well the design of the student classrooms and teacher’s room, and upgrading of the building to current fire and ADA standards. (See FAC, ¶ 12.) On October 5, 2012, Wu and Chen submitted an application for a conditional use permit for a child daycare center at the subject property to the City of San Jose. (See FAC, ¶ 13.) On February 19, 2013, the City notified Wu that it did not support a daycare center use on the subject property but instead supported the conversion of the building into church classrooms, or a “church daycare.” (See FAC, ¶ 15.) Wu conceded to this change, but did not notify Liu, and on May 8, 2013, City granted a conditional use permit to allow the expansion of the church property to include six classrooms. (See FAC, ¶¶ 16-17.) Wu notified Liu that the conditional use permit for the daycare center was granted by the City but did not inform her that the permit allowed for only “church daycare” or classrooms, not a daycare center. (See FAC, ¶ 19.) In reliance on Wu’s representations, Liu sold her existing daycare business in September 2013, and in October 2013, Liu submitted an application for a new license to operate a daycare center at the subject property. (See FAC, ¶ 20.) In January 2014, Liu formed plaintiff corporation Silicon Valley Wonderland, Inc. (“Plaintiff”). (See FAC, ¶ 21.) Thereafter, Plaintiff entered into a written agreement for the construction of improvements for the daycare center, paying over $162,000 to the contractor, and additionally entered into a commercial lease to rent space from defendant Silicon Valley Harvest (“Harvest”) to operate the daycare center. (See FAC, ¶¶ 23-26.) Plaintiff paid rent to Harvest under the lease from May 2014 through July 2015. (See FAC, ¶ 27.) On July 14, 2015, Plaintiff discovered that Wu’s representations regarding the conditional use permit were false and that the permit was merely for classrooms, not a daycare center. (See FAC, ¶ 28.) On April 26, 2016, Plaintiff filed the FAC, asserting causes of action against defendants Wu and Harvest (collectively, “Defendants”) and the unlicensed contractor Rui Shan Li (“Li”) for:

1) Fraud (against Harvest and Wu);
2) Breach of joint venture agreement (against Wu);
3) Breach of lease (against Harvest);
4) Breach of construction contract (against Li);
5) Negligence (against Li);
6) Violation of Business and Professions Code § 7031, subd. (b) (against Li);
7) Breach of the implied covenant of good faith and fair dealing—joint venture agreement (against Wu); and,
8) Breach of the implied covenant of good faith and fair dealing—lease agreement (against Harvest).

On July 13, 2016, Harvest and Wu filed an answer to the FAC, asserting affirmative defenses for:

1) Failure to state facts sufficient to constitute a cause of action;
2) Failure to take reasonable steps to mitigate damages;
3) The doctrine of unclean hands and laches; and,
4) The applicable statute of limitations.

On March 7, 2018, Plaintiff dismissed defendant Li without prejudice.

Plaintiff moves for summary judgment, or, in the alternative, for summary adjudication of the first through third, fifth, seventh and eighth causes of action, and the second through fourth affirmative defenses.

PLAINTIFF SILICON VALLEY WONDERLAND, INC.’S MOTION FOR SUMMARY JUDGMENT

Plaintiff’s burden on summary judgment

The moving party bears the initial burden of production to make a prima facie showing that there are no triable issues of material fact—one sufficient to support the position of the party in question that no more is called for. (Aguilar v. Atlantic Richfield Co. (2001) 25 Cal.4th 826, 850-851.) Plaintiffs moving for summary judgment bear the burden of persuasion that each element of the cause of action in question has been proved, and hence that there is no defense thereto. (Cal. Code Civ. Proc. § 437c.) Plaintiffs, who bear the burden of proof at trial by preponderance of evidence, therefore “must present evidence that would require a reasonable trier of fact to find the underlying material fact more likely than not—otherwise he would not be entitled to judgment as a matter of law, but would have to present his evidence to a trier of fact.” (Aguilar, supra, 25 Cal.4th at p.851.)

The motion for summary adjudication as to the fifth cause of action is MOOT.

The fifth cause of action for negligence was asserted only as to defendant Li. Plaintiff’s memorandum in support of the motion for summary judgment does include a section entitled “WU WAS NEGLIGENT” (see Pl.’s memorandum of points and authorities in support of motion for summary judgment (“Pl.’s memo”), pp. 10:15-28, 11:1); however, as noted by Defendants, Wu is not alleged to have been negligent in the FAC, and it appears that Plaintiff concedes the issue as the argument is not addressed in the reply brief. In light of Plaintiff’s dismissal of Li, Plaintiff’s motion for summary adjudication of the fifth cause of action is MOOT.

There is no cause of action for breach of fiduciary duty asserted by Liu.

Plaintiff also has a section in its memorandum entitled “WU BREACHED HIS FIDUCIARY DUTY TO LIU.” (See Pl.’s memo, p.11:2-26.) However, Liu is not a plaintiff. Even if she were, the moving papers only identify Liu as a cross-defendant and the notice of motion clearly states that the motion is being brought solely by Plaintiff. Thus, it is immaterial if Wu breached any duty owed to Liu. The FAC only alleges that “Wu owed Plaintiff a fiduciary duty of utmost loyalty, honesty and good faith.” (FAC, ¶ 36 (emphasis added).) “It is well established that the pleadings determine the scope of relevant issues on a summary judgment motion.” (Nieto v. Blue Shield of California Life & Health Ins. Co. (2010) 181 Cal.App.4th 60, 74; see also Laabs v. City of Victorville (2008) 163 Cal.App.4th 1242, 1258 (stating that “[t]he complaint limits the issues to be addressed at the motion for summary judgment… [t]he rationale is clear: It is the allegations in the complaint to which the summary judgment motion must respond”); see also Hejmadi v. AMFAC, Inc. (1988) 202 Cal.App.3d 525, 536 (stating that “[o]n summary judgment motions, the pleadings always define the issues”). Plaintiff’s argument that Wu breached a fiduciary duty owed to a party who is neither moving for summary adjudication, nor identified as a plaintiff in the FAC or the motion, nor alleged to have been owed a fiduciary duty by Wu lacks merit.

Similarly, there is no cause of action for breach of joint venture contract asserted by Liu.

Plaintiff also argues that “Wu breached a joint venture contract with Liu.” (Pl.’s memo, pp.9:9-28, 10:1-10.) Again, however, the FAC does not identify Liu as a plaintiff, the moving papers only identify Liu as a cross-defendant, and Plaintiff’s notice of motion clearly states that the motion is being brought solely by Plaintiff. Plaintiff’s argument regarding any breach of the joint venture contract is without merit and Plaintiff fails to meet its initial burden to demonstrate that it is entitled to judgment on the second cause of action for breach of the joint venture agreement, and the necessarily dependent seventh cause of action for breach of the implied covenant of good faith and fair dealing based on the joint venture agreement. Accordingly, Plaintiff’s motion for summary judgment, and its alternative motion for summary adjudication of the second and seventh causes of action is DENIED.

There is also no cause of action for breach of lease asserted against Wu.

In the section, “WU BREACHED HIS… LEASE WITH LIU,” Plaintiff asserts that “Wu also leased Liu the subject premises even though his own lease forbade subletting.” (Pl.’s memo, pp.9:9-10, 10:10-12.) However, the FAC does not allege a cause of action for breach of the lease as to defendant Wu. Instead, the third cause of action is asserted against defendant Harvest. Again, “[i]t is well established that the pleadings determine the scope of relevant issues on a summary judgment motion.” (Nieto v. Blue Shield of California Life & Health Ins. Co. (2010) 181 Cal.App.4th 60, 74; see also Laabs v. City of Victorville (2008) 163 Cal.App.4th 1242, 1258 (stating that “[t]he complaint limits the issues to be addressed at the motion for summary judgment… [t]he rationale is clear: It is the allegations in the complaint to which the summary judgment motion must respond”); see also Hejmadi v. AMFAC, Inc. (1988) 202 Cal.App.3d 525, 536 (stating that “[o]n summary judgment motions, the pleadings always define the issues”). As the FAC does not allege a cause of action for breach of the lease or breach of the implied covenant of good faith and fair dealing based on the lease against defendant Wu, Plaintiff fails to meet its initial burden to demonstrate that it is entitled to judgment on the third and eighth causes of action. Accordingly, Plaintiff’s motion for summary adjudication of the third and eighth causes of action is also DENIED.

Plaintiff fails to meet its initial burden as to the first cause of action for fraud; however, even if it did, there are triable issues of material fact.

The elements of a cause of action for fraud are: (1) a misrepresentation, which includes a concealment or nondisclosure; (2) knowledge of the falsity of the misrepresentation, i.e., scienter; (3) intent to induce reliance on the misrepresentation; (4) justifiable reliance; and (5) resulting damages. (Lazar v. Super. Ct. (Rykoff-Sexton, Inc.) (1996) 12 Cal. 4th 631, 638.) Plaintiff asserts that it is entitled to judgment on the first cause of action for fraud. In support of its motion, Plaintiff presents Liu’s declaration in which she states that Wu made certain representations regarding the pursuit of obtaining the conditional use permit (see Liu decl., ¶ 10); a portion of Wu’s deposition in which he states that he told Liu that City supported the church running a daycare ministry and that City wanted it to apply for a classroom and then later for a state childcare license (see Wu depo, p.310:1-13); and, a portion of Liu’s deposition in which she states that Wu told him that they did not get a conditional use permit for a commercial daycare facility but were approved for church daycare (see Liu depo, p.145:3-14), and Wu made other representations regarding the implications of a church daycare (see Liu depo, pp.145:15-25, 146:1-25, 147:1-15). Plaintiff also presents Liu’s declaration demonstrating its damages. (See Liu decl., ¶¶ 17-21, 26, 31.) However, Plaintiff fails to present evidence of Wu’s intent to induce reliance on the misrepresentation or Wu’s knowledge of the falsity of the misrepresentation. In reply, Plaintiff argues that it “need not establish that Defendants made the representations knowing the falsity of the statement, but rather only need to show that the Defendants made the false statement recklessly and without regard for the truth.” (Pl.’s memo, p.1:18-28, citing Engalla v. Permanente Medical Group, Inc. (1997) 15 Cal.4th 951, 974.) Plaintiff argues that because Wu received the email from the City indicating that it was approved for church daycare and not a commercial daycare facility, that Wu’s representation that the City supported a church daycare and not a commercial daycare, “[a]t the very least, it establishes that Mr. Wu’s statement was made recklessly and without regard to the truth as the statement directly contradicts the email of which he acknowledges he received and was informed of.” (Pl.’s memo, pp.1:28, 2:1-28.) However, although the email indicates that the City was not supportive of a daycare, but was supportive of church classrooms, this is not sufficient to demonstrate that, as a matter of law, Wu was reckless in making the representation that City did not support a commercial daycare but supported a church daycare. Thus, Plaintiff fails to meet its initial burden to demonstrate that it is entitled to judgment on the first cause of action.

Regardless, even if Plaintiff demonstrated Wu’s intent to defraud Plaintiff, Plaintiff’s own evidence—in addition to Defendants’ evidence—demonstrate the existence of a triable issue of material fact as to justifiable reliance. Plaintiff presents Wu’s deposition testimony that indicates that Wu told Liu that City did not support a daycare facility. (See Wu depo, pp.271:18-25, 273:23-25, 274:1-6.) Liu’s deposition testimony also indicates Wu told Liu that City did not approve a permit for commercial daycare, but instead got a permit for church daycare. (See Liu depo, p.145:5-8.) Plaintiff also presents Chen’s deposition testimony in which she indicated that she “definitely forward[ed the email] to Liu” and “ha[d] a meeting after [she] received this [email].” (Chen depo. p.79:1-22.) This evidence by itself demonstrates the existence of a triable issue of material fact as to justifiable reliance. Additionally, Defendants present evidence demonstrating a triable issue of material fact as to justifiable reliance and intent. (See evidence cited by Defs.’ separate statement of undisputed material facts, nos. 15-22, 29-30.) Accordingly, Plaintiff’s motion for summary adjudication of the first cause of action for fraud is DENIED.

Plaintiff’s motion for summary adjudication of Defendants’ second and third affirmative defenses is likewise DENIED.

Plaintiff moves for summary adjudication of the second affirmative defense of mitigation of damages and the third affirmative defense of unclean hands/laches. Plaintiff argues that “a fiduciary cannot require his principal to mitigate damages, and a fiduciary receives no offset to his damages for same.” (Pl.’s memo, p.14:1-3.) As articulated above in the section regarding the purported breach of a fiduciary duty, this argument lacks merit. Plaintiff also argues that it could not have mitigated its damages or have unclean hands because it was unaware of Wu’s fraud and did not engage in any fraud. However, again, as articulated above, Plaintiff fails to meet its initial burden to demonstrate that it is entitled to judgment as to the alleged fraud, and that, in any event, even if it had, there are triable issues of material fact as to both justifiable reliance and Wu’s intent. Accordingly, Plaintiff’s motion for summary adjudication of the second and third affirmative defenses is likewise DENIED.

Plaintiff’s motion for summary adjudication of the fourth affirmative defense is GRANTED.

Plaintiff also moves for summary adjudication of the fourth affirmative defense. Plaintiff meets its initial burden to demonstrate that the action is timely. (See UMFs 40-41.) In opposition, Defendants apparently concede as the argument is not addressed by their opposition. Defendants do not otherwise demonstrate the existence of a triable issue of material fact. Accordingly, Plaintiff’s motion for summary adjudication of the Defendants’ fourth affirmative defense is GRANTED.