Case Name: Vincent & Crystal Isola v. OSM Loan Acquisitions IV.
Case No.: 2015-1-CV-276805

This case arises from a dispute over the terms of a Promissory Note. Currently before the Court is a demurrer to the operative First Amended Complaint (“FAC”) by Defendant OSM Loan Acquisitions IV (“Defendant”).

As an initial matter the Court notes that Defendant appears to have failed to comply with Code of Civil Procedure (“CCP”) §430.41, effective on January 1, 2016, as the Demurrer filed on April 1, 2016 is not accompanied by the now required declaration regarding the parties’ efforts to meet and confer on the issues raised. The absence of such a declaration is not noted in Plaintiffs’ Opposition. The Court will overlook—in this instance only—the parties’ presumed failure to meet and confer. The parties are directed to comply with applicable law in the future.

The Court in ruling on a demurrer treats it “as admitting all material facts properly pleaded, but not contentions, deductions or conclusions of fact or law.” (Piccinini v. Cal. Emergency Management Agency (2014) 226 Cal.App.4th 685, 688, citing Blank v. Kirwan (1985) 39 Cal.3d 311, 318.) “A demurrer tests only the legal sufficiency of the pleading. It admits the truth of all material factual allegations in the complaint; the question of plaintiff’s ability to prove these allegations, or the possible difficulty in making such proof does not concern the reviewing court.” (Committee on Children’s Television, Inc. v. General Foods Corp. (1983) 35 Cal.3d 197, 213-214.)

Allegations are not accepted as true on demurrer if they contradict or are inconsistent with facts judicially noticed. Similarly, facts appearing in exhibits attached to the complaint (part of the “face of the pleading”) are given precedence over inconsistent allegations in the complaint. (See Holland v. Morse Diesel Int’l, Inc. (2001) 86 Cal.App.4th 1443, 1447. See also Barnett v. Fireman’s Fund Ins. Co. (2001) 90 Cal.App.4th 500, 505 [“[T]o the extent the factual allegations conflict with the content of the exhibits to the complaint, we rely on and accept as true the contents of the exhibits and treat as surplusage the pleader’s allegations as to the legal effect of the exhibits.”] See also Witkin, California Evidence (4th Ed., 2000) 1 Judicial Notice §3(3) [“It has long been established in California that allegations in a pleading contrary to judicially noticed facts will be ineffectual; i.e., judicial notice operates against the pleader.”])

Defendant’s request for judicial notice of the October 28, 2010 Promissory Note entered into by the Isola Living Trust as borrower and Plaza Bank as lender, and signed by both Plaintiffs as trustees of the Isola Living Trust is GRANTED pursuant to Evid. Code §452(h). While the general rule is that contracts between private parties cannot be judicially noticed, here the FAC itself at 6 alleges that Plaintiffs executed the Note and states that a copy is attached as Exhibit A to the FAC. No such exhibit is attached to the copy of the FAC present in the court file. The FAC goes on to quote terms of the Note and generally incorporate it by reference, making judicial notice appropriate. The Court also notes that Plaintiffs raise no objection to the request for judicial notice in their opposition to the demurrer.

Defendant’s demurrer to the FAC’s second cause of action for breach of contract on the ground that it fails to state sufficient facts (Notice of Demurrer and Demurrer at 2:1-3) is SUSTAINED with 10 days’ leave to amend.

The FAC at 7-8 admits that the Note includes an “INTEREST AFTER DEFAULT” provision and a “LATE CHARGE” provision. The FAC at 10-12 further admits that Plaintiffs failed to make timely payment on the Note to Plaza Bank in September 2014, that Plaza Bank recorded a Notice of Default on October 16, 2014, and that Plaza Bank assigned its interest in the Note and Deed of Trust to Defendant on or about November 7, 2014.

To properly state a breach of contact claim a plaintiff must allege: 1) the existence of a contract; 2) Plaintiff’s performance or excuse for nonperformance; 3) Defendant’s breach, and; 4) damage to Plaintiff resulting from that breach. (Rutherford Holdings, LLC v. Plaza Del Rey (2014) 223 Cal.App.4th 221, 228, citing Careau & Co. v. Security Pacific Business Credit, Inc. (1990) 222 Cal.App.3d 1371, 138.)

The FAC’s second cause of action for breach of contract alleges in pertinent part that Defendant “breached the Note with Plaintiffs by assessing and collecting from Plaintiffs default interest pursuant to the ‘INTEREST AFTER DEFAULT’ provision in the Note.” FAC at 34. This is the only breach alleged. As presently alleged this cause of action clearly fails to state sufficient facts as it is contradicted by the FAC’s factual admissions and the terms of the judicially noticed Note which control over any contrary or inconsistent allegations in the FAC.

An action expressly authorized by a contract (here the Note) cannot be a breach of its terms regardless of Plaintiffs’ arguments that the Note should be found void. Plaintiffs admit that they failed to make timely payment and that as a result they were in default. Once they were in default Plaza Bank—and then Defendant once Plaza Bank assigned its interest to Defendant—had the contractual right to increase the interest rate as set forth in the Note’s “INTEREST AFTER DEFAULT” provision. Plaintiffs cannot base a breach of contract claim on any action authorized under the Note once the borrower is in default, which Plaintiffs have admitted they were after October 16, 2014. “While inconsistent theories of recovery are permitted, a pleader cannot blow hot and cold as to the facts positively stated.” (Manti v. Gunari (1970) 5 Cal.App.3d 442, 449, internal citation omitted.)

As this is the first challenge to Plaintiffs’ pleading that has been presented to the Court for a ruling 10 days’ leave to amend is granted. Plaintiffs are cautioned that when a demurrer is sustained with leave to amend, the leave must be construed as permission to the pleader to amend the causes of action to which the demurrer has been sustained, not permission to add entirely new causes of action. (Patrick v. Alacer Corp. (2008) 167 Cal.App.4th 995, 1015.) To raise claims entirely unrelated to those originally alleged requires either a new lawsuit or a noticed motion for leave to amend. Absent prior leave of court an amended complaint raising entirely new and different causes of action may be subject to a motion to strike. (See also Harris v. Wachovia Mortg., FSB (2010) 185 Cal.App.4th 1018, 1023 [“Following an order sustaining a demurrer or a motion for judgment on the pleadings with leave to amend, the plaintiff may amend his or her complaint only as authorized by the court’s order. The plaintiff may not amend the complaint to add a new cause of action without having obtained permission to do so, unless the new cause of action is within the scope of the order granting leave to amend.”])

The Court notes that Plaintiffs in their opposition state that they may “plead alternative causes of action” if the present demurrer to the breach of contract claim were to be sustained and they mention some such alternative claims. However, because Plaintiffs do not specify an alternative claim the Court cannot be certain that any newly added claim would be within the scope of this Order. Therefore the Court rules that any request to amend by adding new causes of action must first be presented in a noticed motion for leave to amend.