VALENTINO CASTELLANOS, ET AL. v. SUN 1031 EXCHANGE LLC, ET AL.
Case No.: 1-13-CV-249411
DATE: May 13, 2014
TIME: 9:00 a.m.
DEPT.: 8

The Court in ruling on a demurrer or motion to strike considers only the pleading under attack, any attached exhibits (part of the “face of the pleading”) and any facts or documents for which judicial notice is properly requested and may be granted. Any purported requests for judicial notice that do not comply with Rule of Court 3.1113(l) are denied. The Court cannot consider extrinsic evidence in ruling on a demurrer or motion to strike. Accordingly, the Court has not considered the declaration of Plaintiff Tim Tyler or Defendant Shawn Coleman or any attached exhibits. There is no statutory basis for the filing of objections to evidence in the context of a demurrer or motion to strike, nor is there any basis for striking a declaration. Any such requests have not been considered by the Court and they are irrelevant in any event as the Court has not considered extrinsic evidence.

Attorneys are required to be familiar with the California Rules of Court. Therefore all counsel should be aware that, except in the context of a summary judgment or adjudication motion, no opening or responding memorandum may exceed 15 pages and no reply may exceed 10 pages. In the event a party feels that a longer memorandum is required (unlikely in the context of a demurrer or motion to strike) they may apply to the court ex parte with written notice to all other parties at least 24 hours before the memorandum is due (which here would have been no later than April 18, 2014). Rule of Court 3.1113(e),(f). An oversized memorandum filed without prior permission is considered in the same manner as a late-filed paper; whether it will be considered at all or only in part is matter for the Court’s discretion. Rule of Court 3.1113(g); 3.1300(d).

The Request for Judicial Notice of two documents (exhibits A & B) by Defendant Matthew Vredevoogd (“MV”) is DENIED. Ex. A is not a true and correct copy of the Court’s final order, but only a copy of the Court’s prior tentative ruling. Ex. B is not a copy of the operative Second Amended Complaint (“SAC”) as the request states at 2:3-4, but instead is a copy of the no longer operative First Amended Complaint (“FAC”).

The Court does, on its own motion, take judicial notice of the verified FAC pursuant to Evid. Code §452(d) in light of Defendants’ arguments regarding sham pleading. A court may take judicial notice of admissions or inconsistent allegations by a plaintiff in earlier pleadings in the same lawsuit and may disregard conflicting allegations in the operative complaint. It is a plaintiff’s duty to plead around such admissions by including in the operative complaint a satisfactory explanation as to why the earlier admissions are incorrect. Otherwise the plaintiff is bound by the earlier admission. “The general rule . . . is that material factual allegations in a verified pleading that are omitted in a subsequent amended pleading without adequate explanation will be considered by the court in ruling on a demurrer to the later pleading.” Shoemaker v. Myers (1990) 52 Cal 3d 1, 12-13.

The Request for Judicial Notice of one document (Ex. A) by Defendants Neel Bhatia, Cassidy Turley Northern California, Inc. and Cassidy Turley Commercial Real Estate Services (“Cassidy Defendants”) is GRANTED pursuant to Evid. Code §452(d). Ex. A is a true and correct copy of the Jan. 14, 2014 final Order of the Court (Hon. McKenney) on the prior demurrers and motions to strike the FAC.

The Castellanos Plaintiffs’ Request for Judicial Notice of a single document (Ex. A) in support of their opposition to the Cassidy Defendants’ Demurrer and Motion to Strike is DENIED. As the Court (Hon. McKenney) noted in denying the previous request for the Court take judicial notice of this same document (then presented as Ex. C) in the Jan. 14, 2014 Order: A precondition to judicial notice in either its permissive or mandatory form is that the matter to be noticed be relevant to the material issue before the Court. Silverado Modjeska Recreation and Park Dist. v. County of Orange (2011) 197 Cal App 4th 282, 307, citing People v. Shamrock Foods Co. (2000) 24 Cal 4th 415, 422 fn. 2. The document remains irrelevant as statutory interpretation is a question of law for the Court even on demurrer.

Both sets of Plaintiffs’ Request for Judicial Notice of seven documents (exhibits A-G) in support of their opposition to the Demurrer and Motion to Strike brought by the Sun Defendants and Defendant Coleman is GRANTED pursuant to Evid. Code §452(d) (court records). Only the Court Order (Ex. G) can be noticed as to the truth of its contents, but the other exhibits demonstrate Defendant Coleman’s appearance in the case without objecting on the basis of lack of personal jurisdiction.

Defendant MV’s joinder in the demurrers and motions to strike brought by the Cassidy Defendants and by Defendant Coleman and the Sun Defendants is GRANTED.

“In reviewing the sufficiency of a complaint against a general demurer, we are guided by long settled rules. ‘We treat the demurrer as admitting all material facts properly pleaded, but not contentions, deductions or conclusions of fact or law. We also consider matters which may be judicially noticed.’” Blank v. Kirwan (1985) 39 Cal.3d 311, 318. The general rule is that statutory causes of action must be pleaded with particularity. See Lopez v. Southern California Rapid Transit District (1985) 40 Cal.3d 780, 795; Covenant Care, Inc. v. Superior Court (2004) 32 Cal.4th 771, 790. As was the case with the prior pleading, the SAC consists of many conclusory statements that fail to allege statutory violations with sufficient particularity, sufficiently plead delayed discovery or establish alleged duties of care. Increasing the number of causes of action alleged in conclusory fashion does not cure the defects identified by the prior Order; it simply results in an unnecessarily long 124-page SAC.

The alleged wrongdoing on which this case is based remains the sale of securities to the “Castellanos Plaintiffs” in October 2008 and to the “Tyler Plaintiffs” in December 2008. FAC at 29; SAC at 29. Plaintiffs’ original complaint in this action was not filed until July 12, 2013, more than four years later. Accordingly, despite the conclusory allegations that because of “deceptions, misrepresentations and concealments . . . Plaintiffs’ did not become aware of the unqualified nature of the Securities until mid-2013,” SAC at 30, Plaintiffs’ claims are clearly time barred unless they can satisfy the requirements of the delayed discovery rule.

“In order to rely on the discovery rule for delayed accrual of a cause of action, ‘[a] plaintiff whose complaint shows on its face that his claim would be barred without the benefit of the discovery rule must specifically plead facts to show (1) the time and manner of discovery and (2) the inability to have made earlier discovery despite reasonable diligence.’ In assessing the sufficiency of the allegations of delayed discovery, the court places the burden on the plaintiff to ‘show diligence’; ‘conclusory allegations will not withstand demurrer.’” Fox v. Ethicon Endo-Surgery, Inc. (2005) 35 Cal.4th 797, 808, internal citations omitted, emphasis added. To be entitled to the benefit of the delayed discovery rule a plaintiff must specifically plead the time and manner of discovery and show the following: 1) Plaintiff had an excuse for late discovery; 2) Plaintiff was not at fault in discovering facts late; 3) Plaintiff did not have actual or presumptive knowledge to be put on inquiry; 4) Plaintiff was unable to make earlier discovery despite reasonable diligence. E-Fab, Inc. v. Accountants, Inc. Services (2007) 153 Cal App 4th 1308, 1319, 1324-1325.

Plaintiffs cannot evade the pleading requirements for delayed discovery, such as reasonable diligence in discovering facts, by making general, conclusory allegations that “Plaintiffs and Defendants were in a fiduciary or confidential relationship” that, without explanation, excused their failure to learn of any alleged wrongdoings until “mid-2013.”

The existence of a fiduciary duty of care, as with duties of care generally, is a question of law for the Court. “In order to plead a cause of action for breach of fiduciary duty, there must be shown the existence of a fiduciary relationship, its breach, and damage proximately caused by that breach. The absence of any one of these elements is fatal to the cause of action.” Brown v. California Pension Administrators & Consultants, Inc. (1996) 45 Cal.App.4th 333, 347-348; see also CACI, No. 605. “While breach of fiduciary duty is a question of fact, the existence of legal duty in the first instance and its scope are questions of law.” Kirschner Brothers Oil, Inc. v. Natomas Co. (1986) 185 Cal.App.3d 784, 790.

Confidential relationships and fiduciary relationships are not synonymous and the allegation of a close confidential relationship does not in itself establish the existence of a fiduciary duty. “[B]ecause of ‘[t]he vagueness of the common law definition of the confidential relation that gives rise to a fiduciary duty, and the range of the relationships that can potentially be characterized as fiduciary,’ the ‘essential elements’ have been distilled as follows: ‘1) The vulnerability of one party to the other which 2) results in the empowerment of the stronger party by the weaker which 3) empowerment has been solicited or accepted by the stronger party and 4) prevents the weaker party from effectively protecting itself.’” Persson v. Smart Inventions, Inc. (2005) 125 Cal. App. 4th 1141, 1160-1161, internal quotations and citations omitted, emphasis added. See also City of Hope Nat. Med. Center v. Genentech, Inc. (2008) 43 Cal 4th 375, 386, quoting Committee on Children’s Television, Inc. v. General Foods Corp. (1983) 35 Cal 3d. 197, 221 (“'[B]efore a person can be charged with a fiduciary obligation, he must either knowingly undertake to act on behalf and for the benefit of another, or must enter into a relationship which imposes that undertaking as a matter of law.’”) Alleging that various Defendants “held themselves out” as having expertise does not establish that they owed fiduciary duties and the legal conclusion that the parties were in a fiduciary relationship, repeated throughout the SAC, is not accepted as true by the Court on demurrer.

Cassidy Defendants Demurrer and Motion to Strike
The Cassidy Defendants demurrer to the SAC’s 2nd, 6th, 9th, 13th, 16th, 19th, 22nd 24th and 28th causes of action alleged against them by the Castellanos Plaintiffs only on the basis that they each fail to state sufficient facts.

The demurrer to the SAC’s 2nd cause of action (“Unlicensed Broker-Dealer”) formerly part of the 1st cause of action in the FAC, on the ground that it fails to state sufficient facts is SUSTAINED. This claim is based on Defendants’ alleged violation of §25501.5 (“Rescission action against unlicensed broker-dealer”). SAC at 50. The alleged sale of securities to the “Castellanos Plaintiffs” took place in October 2008 and this claim is therefore time-barred. As was stated on the prior order, the default three-year limitations period in CCP §338(a) applies here. Even if Plaintiffs had properly pled delayed discovery in the SAC (and they have not), it only applies to actions for fraud or mistake under CCP §338(d) not statutory violations under §338(a). Further leave to amend is DENIED.

The demurrer to the SAC’s 6th cause of action (“Material Representations in Offer & Sales of Securities”), formerly part of the 4th cause of action in the FAC, based on alleged violations of Corp. Code §§25401, 25501 and 25504 is SUSTAINED. Even if it is assumed that the heightened pleading standards for fraud do not apply to this claim, statutory claims must be plead with particularity and Plaintiffs’ continued reliance on conclusory statements regarding alleged “misrepresentations and/or omissions” does not satisfy this requirement. Plaintiffs have also failed to establish the existence of a fiduciary relationship between themselves and the Cassidy Defendants and so cannot use the existence of such a relationship and alleged reliance upon it to evade the requirements for pleading delayed discovery. Defendants are correct that the SAC admits (at 22) that there was no actual privity between the Plaintiffs and the Cassidy Defendants as the Sun Defendants are alleged to have sold the securities to Plaintiffs. Nor does the later allegation at 254 (which is not even part of the cause of action) cure the defect as Plaintiffs argue in their opposition. Defendants are also correct that the decision in Moss v. Kroner (2011) 197 Cal App 4th 860,cited by Plaintiffs, stands only for the proposition that, the alleged “control persons” in a Section 25504 claim need not be in privity with the plaintiffs but privity is required to establish the underlying violation of §25501, from which §25504 is derived. See Moss at 228-229, internal citations omitted (“The need for privity stems from the liability derived from §25501 which the courts have uniformly interpreted to require privity . . . . The person alleged to be controlled by the defendants must be alleged to be in privity with the plaintiffs.”) More importantly, regardless of the Moss holding, the California Supreme Court has addressed §25501: “The Legislature . . . knew how to write a statute that conditioned liability on privity. In section 25501 the Legislature did just that in these words: ‘Any person who violates Section 25401 shall be liable to the person who purchases a security from him or sells a security to him . . .’ . . . In other words, ‘[u]nder Section 25501 the defendant is only liable to the person with whom he deals; whereas, under Section 25500 the defendant may be liable to any person trading in the market . . .’” Mirkin v. Wasserman (1993) 5 Cal 4th 1082, 1104, internal citations omitted.

As Plaintiffs cannot amend to allege direct privity without contradicting prior verified allegations, further leave to amend is DENIED.

The demurrer to the SAC’s 9th cause of action (“Materially Assisting Persons”), formerly part of the FAC’s 5th cause of action, based on alleged violations of Corp. Code §§25504 & 25504.1, is SUSTAINED with 10 days’ leave to amend. Again, Plaintiffs have not alleged a statutory claim with sufficient particularity and cannot rely on general allegations that fail to establish a fiduciary relationship or general allegations of misrepresentations or omissions to properly state a claim. As the prior Order noted, “[t]he plain language of section 25504.1 makes clear that a person must have materially assisted in the securities law violation. Therefore, for purposes of section 25504.1, it is not enough that a person provided material assistance in a larger scheme to defraud if that person had no role or involvement in the part of the scheme that constituted a violation of the securities laws.” AREI II Cases (2013) 216 Cal App 4th 1004, 1014, emphasis in original. The current allegations continue to fail to establish that the Cassidy Defendants “materially assisted” in the alleged violations, despite prior leave to amend.

The demurrer to the SAC’s 13th (“Fraud & Deceit”) and 16th (“Negligent Misrepresentation”) causes of action, formerly part of the FAC’s 7th & 8th causes of action, are SUSTAINED with 10 days’ leave to amend. Both causes of action are time-barred on their face and, despite prior leave to amend to address the issue, Plaintiffs have failed to adequately allege delayed discovery. The inadequate allegations of fiduciary duty do not excuse the failure to properly allege delayed discovery. Both claims also fail to allege the elements of fraud or negligent misrepresentation with sufficient specificity. Fraud requires a) misrepresentation (false representation, concealment or nondisclosure); b) Knowledge of falsity; c) intent to defraud/induce reliance; d) justifiable reliance; and e) resulting damage. Philipson & Simon v. Gulsvig (2007) 154 Cal App 4th 347, 363. The law is well established that in order to state a cause of action for fraud, each of the elements must be pled with specificity. Committee on Children’s Television, Inc. v. General Foods Corp. (1983) 35 Cal.3d 197, 216-217. In pleading fraud against a corporate defendant, the requirement that fraud be pled with specificity “requires the plaintiff to allege the names of the persons who made the allegedly fraudulent representations, their authority to speak, to whom they spoke, what they said or wrote, and when it was said or written.” Tarmann v. State Farm Mut. Auto. Ins. Co. (1991) 2 Cal.App.4th 153, 157; see also Lazar v. Superior Court (1996) 12 Cal.4th 631, 645. Where a fraud claim is based on failure to disclose, and the duty to disclose arises from the making of representations that were misleading or false, those representations should be described. Morgan v. AT & T Wireless Services, Inc. (2009) 177 Cal App 4th 1235, 1262.

The demurrer to the SAC’s 19th cause of action (“Negligence”), formerly part of the FAC’s 9th cause of action, is SUSTAINED with 10 days’ leave to amend. The claim is based on the October 2008 purchase of securities and is time-barred pursuant to the two-year statute of limitations in CCP §335.1. Despite prior leave to amend, Plaintiffs have failed to adequately allege delayed discovery or the existence of fiduciary duty.

The demurrer to the SAC’s 22nd cause of action (“Breach of Fiduciary Duty”), formerly part of the FAC’s 12th cause of action, is SUSTAINED with 10 days’ leave to amend. As discussed above, despite being given prior leave to amend Plaintiffs have failed to state facts sufficient to establish that the Cassidy Defendants owed them a fiduciary duty.

The demurrer to the SAC’s 24th cause of action (“Respondeat Superior”), formerly part of the FAC’s 13th cause of action, is SUSTAINED with 10 days’ leave to amend. As Plaintiffs have failed to properly plead the underlying claims on which this one depends, or establish that any of them are not time-barred, they have failed to state any wrongdoing by individual defendant Neel Bhatia for which the remaining Cassidy Defendants are responsible.

The demurrer to the SAC’s 28th cause of action (Violation of Probate Code §859), formerly part of the FAC’s 16th cause of action, is SUSTAINED with 10 days’ leave to amend. As all of the underlying claims fail to state sufficient facts and/or are time-barred, this cause of action fails as well.

The Cassidy Defendants’ Motion to Strike paragraphs 173 (part of the SAC’s 13th cause of action), 211 (part of the 16th cause of action), 258 (part of the 22nd cause of action) and 270 is DENIED as MOOT in light of the above rulings on their demurrer. The Motion to Strike line 4 of the SAC’s Prayer is DENIED as it makes no reference to the Cassidy Defendants.

Defendant MV’s Demurrer
While the SAC at 8 and 36 alleges for the first time, more than five years after the events in question, that MV was associated with the Sun Defendants, no explanation for this material change is provided in the SAC and these allegations are disregarded as the Tyler Plaintiffs and Castellanos Plaintiffs remain bound by the prior admission in the verified FAC at 7 (excluding MV from the definition of the “Sun Defendants”) and the admission at 22 that “[t]he Securities were offered and sold by the Sun Defendants to Plaintiffs in California . . .”

Defendant MV’s demurrer to all causes of action in the SAC to the extent that they are purportedly alleged against him by the Castellanos Plaintiffs, unopposed by the Castellanos Plaintiffs (See Opp. to MV Demurrer at 2:1-3, stating that only the Tyler Plaintiffs oppose the MV demurrer) is SUSTAINED without leave to amend.

Defendant MV’s demurrer to the SAC’s 1st cause of action (“Unlicensed Broker Dealer”) on the ground that it fails to state sufficient facts is SUSTAINED. Not only is the action time-barred by operation of CCP §338 as explained above in the discussion of the Cassidy Defendants’ demurrer to the 2nd cause of action but Plaintiffs are also bound by the allegations in the verified FAC excluding MV from the “Sun Defendants.” Further leave to amend is DENIED.

Defendant MV’s demurrer to the SAC’s 3rd cause of action (“Unlicensed Broker Dealer,” based on violation of Corp. Code §25501.5) as alleged against him by the Tyler Plaintiffs is SUSTAINED. The alleged sale of securities to the “Tyler Plaintiffs” took place in December 2008 and this claim is therefore time-barred as alleged by either group of Plaintiffs. As was stated on the prior order, the default three-year limitations period in CCP §338(a) applies here. Even if Plaintiffs had properly pled delayed discovery in the SAC (and they have not), it only applies to actions for fraud or mistake under CCP §338(d) not statutory violations under §338(a). Further leave to amend is DENIED.

Defendant MV’s demurer to the SAC’s 4th cause of action (“Unsuitable Investment Services”), formerly part of the FAC’s 2nd cause of action, is SUSTAINED. This claim is based on the alleged violation of Civ. Code §3372. Despite prior leave to amend, this claim still fails to allege actions or statements by MV with the particularity required for statutory claims. The claim is also time-barred under CCP §338(a). Further leave to amend is DENIED.

Defendant Coleman’s Motion to Strike and the Sun Defendants’ Demurrer

The Motion to Strike by Defendant Shawn Coleman on the basis of lack of personal jurisdiction is DENIED. This is not a proper basis for a motion to strike. See CCP §436. Filing a motion to strike constitutes a general appearance. See CCP §1014; Goodwine v. Sup. Ct. (1965) 63 Cal 2d 481, 484. So does an attorney’s appearance for a defendant at, and participation in, a case management conference without objecting as to lack of personal jurisdiction as the case management process “is premised on the trial court having jurisdiction over the parties participating in it.” Mansour v. Sup. Ct. (1995) 38 Cal App 4th 1750, 1757. The Court’s file and the judicially noticed material demonstrates that counsel for Defendant Coleman has participated in the case management process matter without objecting on the basis of lack of personal jurisdiction. Furthermore Defendant Coleman previously brought a petition to compel arbitration in this matter, which was denied by the Court (Hon. McKenney) on Jan. 22, 2014. In sum, Defendant Coleman has long since generally appeared in this action and had any properly noticed and filed motion to quash been made it would be denied on that basis.

The Demurrer to the SAC by Defendant Coleman, Defendant Sun 1031, LLC and Defendant Sun Capitol LLC is OVERRULED. The Court declines to consider the 24 page memorandum filed in support of the demurrer without prior leave of court. This ruling is without prejudice to these Defendants’ ability to later file either another demurrer to a subsequent pleading or a properly noticed motion for judgment on the pleadings pursuant to CCP §438 that complies with all applicable statutes and rules of court.