Case Name: Hamid Khazaeli v. David Brewer, et al.
Case No.: 2017-CV-310507

Demurrer to the First Amended Complaint by Defendants David Brewer and Former NT Corp.

Factual and Procedural Background

This action initiated by plaintiff Hamid Khazaeli (“Plaintiff”) against defendants David Brewer (“Brewer”), Former NT Corp. (“FNC”), and Globo Mobile Technologies (“Globo”) arises out of the alleged failure to satisfy a judgment in an underlying action.

According to the allegations of the First Amended Complaint (“FAC”), on January 27, 2014, Plaintiff filed suit against Globo alleging its failure to hire him was discriminatory and/or retaliatory and violated public policy (“Underlying Action”). (FAC at ¶ 15.) In October 2016, Plaintiff obtained a judgment against Globo totaling $5,147,898.00 (“Judgment”). (Id. at ¶ 23.) In order to collect the Judgment, Plaintiff served Brewer, the chairman and shareholder of FNC, with an Order for Appearance and Examination and Document Subpoena. (Id. at ¶¶ 11-12.)

Plaintiff sought to collect the Judgment from FNC and Brewer because of an agreement entered into with Globo. In October 2013, Notify Technology Corporation changed its name to FNC, which Plaintiff also alleges is NTC’s successor-in-interest. (FAC at ¶¶ 2, 12.) That same month, FNC sold its assets to Globo and executed an agreement to that effect (“Asset Purchase Agreement”). (Id. at ¶ 12.) The Asset Purchase Agreement contained an indemnification clause where FNC agreed to indemnify Globo against potential liabilities, including lawsuits initiated by its employees. (Ibid.) Under Article 7 of the Asset Purchase Agreement, $1 million was deposited into an escrow account to pay for the defense and/or adverse judgment of any indemnified lawsuit. (Ibid.) The procedures for removing funds from escrow were detailed in a separate agreement. (Ibid.)

Article 7 was subsequently modified and further explained by the amendment to the Asset Purchase Agreement entered into by FNC and Globo on October 17, 2013 (“Amendment to Asset Purchase Agreement). (FAC at ¶ 13.) The Amendment to Asset Purchase Agreement specifically addressed any potential claims brought by Plaintiff, stating any claim initiated by him relating to any event specified in an e-mail he wrote on October 3, 2013 to Makis Bonanos is an “Excluded Liability for which Seller shall indemnify any Buyer Indemnified Person pursuant to Article 7 of the Purchase Agreement.” (Ibid.) On January 27, 2014, Plaintiff filed the Underlying Action against Globo. (Id. at ¶ 15.)

On February 5, 2014, Globo notified FNC that the lawsuit was covered under the Asset Purchase Agreement. (FAC at ¶ 16.) Globo subsequently made two claims to FNC for indemnification to cover the costs arising out of the Underlying Action. The first claim was for $40,000, which was ultimately paid. (Id. at ¶ 17.) The second claim was for the remainder of the $1 million contained in the escrow account. (Id. at ¶ 18.) Plaintiff does not allege whether FNC denied or conceded liability to the second claim.

In late 2015, Globo “became effectively insolvent” as a result of its parent company’s bankruptcy and debts. (FAC at ¶ 19.) After hearing of its insolvency, Brewer approached Globo about releasing the remaining $960,000.00 in escrow. (Id. at ¶ 20.) In January 2016, Globo and Brewer agreed to terminate the escrow account, disbursing $50,000.00 to Darga LLC (“Darga”) and the remaining $910,000.00 to FNC. (Id. at ¶ 21.) This agreement was made to prevent Plaintiff from recovering any money as a result of the eventual judgment. (Id. at ¶ 22.)

On May 4, 2017, Plaintiff filed a Complaint alleging causes of action for: (1) fraudulent transfer –actual fraud; (2) fraudulent transfer –constructive fraud; (3) noncompliance with levy; (4) creditor’s suit; and (5) alter ego.

Defendants Brewer and FNC (collectively, “Defendants”) filed a demurrer to the Complaint on the grounds of misjoinder, uncertainty, and failure to state facts to constitute a cause of action. The Court overruled the demurrer in its entirety.

On May 10, 2018, Plaintiff filed the operative FAC setting forth causes of action for: (1) conversion; (2) noncompliance with levy; (3) creditor’s suit; and (4) alter ego.

Demurrer to the FAC

Currently before the Court is Defendants’ demurrer to the FAC on the ground that it fails to state a cause of action. (Code Civ. Proc., § 430.10, subd. (e).) Plaintiff filed written opposition. Defendants filed reply papers.

Legal Standard

“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.) “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.)

“The reviewing court gives the complaint a reasonable interpretation, and treats the demurrer as admitting all material facts properly pleaded. The court does not, however, assume the truth of contentions, deductions or conclusions of law. … [I]t is error for a trial court to sustain a demurrer when the plaintiff has stated a cause of action under any possible legal theory. And it is an abuse of discretion to sustain a demurrer without leave to amend if the plaintiff shows there is a reasonable possibility any defect identified by the defendant can be cured by amendment.” (Gregory v. Albertson’s, Inc. (2002) 104 Cal.App.4th 845, 850.)

First Cause of Action: Conversion

The first cause of action is a claim for conversion. “Conversion is the wrongful exercise of dominion over the property of another. The elements of a conversion claim are: (1) the plaintiff’s ownership or right to possession of the property; (2) the defendant’s conversion by a wrongful act or disposition of property rights; and (3) damages.” (Lee v. Hanley (2015) 61 Cal.4th 1225, 1240.)

To establish a viable cause of action for conversion, Plaintiff must establish an actual interference with his ownership or right of possession of property. (Sanowicz v. Bacal (2015) 234 Cal.App.4th 1027, 1041.) To do that he must have “either ownership and the right of possession or actual possession [of the property] at the time of the alleged conversion thereof. [Citation.]” (Ibid.)

Here, Plaintiff alleges he has a right to payment from Globo in an amount in excess of $5 million as a result of the Judgment. (FAC at ¶ 25.) Defendant Brewer allegedly converted the monies in the escrow account by paying $50,000.00 to Darga and diverting the remainder of the escrow monies to Defendants in the amount of $910,000 to prevent Plaintiff from obtaining these funds to satisfy his impending judgment. (Id. at ¶ 28.)

Defendants persuasively argue that Plaintiff fails to allege an ownership interest or right of possession at the time of the alleged conversion. Plaintiff seeks to collect money obtained from a Judgment entered in October 2016. (FAC at ¶ 23.) Defendants however allegedly converted monies in the escrow account at some point between January and April 2016 before the entry of Judgment. (Id. at ¶ 21.) Therefore, Plaintiff would need to establish an ownership interest or right of possession to funds in the escrow account prior to the entry of Judgment. Plaintiff alleges he was the third-party beneficiary of the escrow money under terms of the Asset Purchase Agreement and subsequent amendment. (Id. at ¶ 27.) However, “a mere contractual right of payment, without more, will not suffice” to support a claim for conversion. (Farmers Ins. Exchange v. Zerin (1997) 53 Cal.App.4th 445, 452.) Plaintiff further attempts to bolster his claim by stating in opposition that he has an equitable lien on monies held in escrow which became effective upon signing the Amendment to the Asset Sale Agreement in 2013. (See OPP at pp. 11-12.) Such arguments are absent from the FAC and thus do not state a cause of action for conversion. (See Ion Equipment Corp. v. Nelson (1980) 110 Cal.App.3d 868, 881 [“The purpose of a general demurrer is to determine the sufficiency of the complaint and the court should only rule on matters disclosed in that pleading.”].)
Accordingly, the demurrer to the first cause of action is SUSTAINED WITH 10 DAYS’ LEAVE TO AMEND after service of this order for failure to state a claim. (See Aubry v. Tri-City Hospital Dist. (1992) 2 Cal.4th 962, 970 [in furtherance of justice great liberality should be exercised in permitting a plaintiff to amend his complaint].)

Second Cause of Action: Noncompliance with Levy

The second cause of action is a claim under Code of Civil Procedure section 701.020 for noncompliance with levy. That section provides in relevant part that “[i]f a third person is required by this article to deliver property to the levying officer or to make payments to the levying officer and the third person fails or refuses without good cause to do so, the third person is liable to the judgment creditor…” (Code Civ. Proc., § 701.020, subd. (a).)

Here, Plaintiff alleges Defendants were required to deliver the sum of $960,000.00 (plus interest) in February 2017 to the levying officer, yet instead knowingly and intentionally disposed of such payment by removing it from the escrow account established for the benefit of Plaintiff. (FAC at ¶ 34.) By virtue of their actions, Defendants are liable to Plaintiff for the full amount of $960,000.00 (plus interest). (Id. at ¶ 35.) Defendants argue this claim is defective as Plaintiff does not offer any legal or equitable basis showing they were in possession of the debtor’s property when the notice of levy was served. (See Memo of P’s & A’s at p. 7.) This contention however is beyond the scope of general demurrer which considers only the well-pleaded factual allegations of the FAC. All that is necessary here are facts demonstrating that Defendants were required to make payments to the levying officer and failed to do so without good cause and thus are liable to Plaintiff. Such allegations are sufficiently pled to withstand a general demurrer.

Consequently, the demurrer to the second cause of action on the ground that it fails to state a claim is OVERRULED.

Third Cause of Action: Creditor’s Suit

The third cause of action is a claim for creditor’s suit under Code of Civil Procedure sections 697.710, 708.120 and 708.210.

Section 697.710 provides “[a] levy on property under a writ of execution creates an execution lien on the property from the time of levy until the expiration of two years after the date of issuance of the writ unless the judgment is sooner satisfied.” (Code Civ. Proc., § 697.710.)

Section 708.120, subdivision (c) states “[i]f the property in the third person’s possession or control in which the judgment debtor has an interest or the debt owed by the third person to the judgment debtor is described in the affidavit or application for an order under subdivision (a) in a manner reasonably adequate to permit it to be identified, service of the order on the third person creates a lien on the judgment debtor’s interest in the property or on the debt for a period of one year from the date of the order unless extended or sooner terminated by the court.” (Code Civ. Proc., § 708.120, subd. (c).)

Finally, section 708.210 provides “[i]f a third person has possession or control of property in which the judgment debtor has an interest or is indebted to the judgment debtor, the judgment creditor may bring an action against the third person to have the interest or debt applied to the satisfaction of the money judgment.” (Code Civ. Proc., § 708.210.)

Here, Plaintiff alleges Defendants were in possession and control of monies owed to Plaintiff at the time of service of the levy on January 21, 2017. (FAC at ¶ 39.) Before filing this action, Plaintiff attempted to levy on the property and/or debt under a writ of execution in the possession and control of Brewer on February 1, 2017 and he failed without good cause to perform the duties of the garnishee. (Id. at ¶ 40.) As a result of Defendants’ failure to comply with these code sections, they are liable and indebted to Plaintiff pursuant to the Judgment in the amount of $960,000.00 plus interest. (Id. at ¶ 41.)

Defendants argue the third cause of action is defective as Plaintiff fails to allege that Defendants possessed or controlled property in which the judgment debtor has an interest or is otherwise indebted to the judgment debtor. This contention is not well taken as the FAC specifically alleges Defendants were in possession of monies owed to Plaintiff at the time of service of the levy. (FAC at ¶ 39.) Such allegations must be accepted as true for purposes of demurrer. (See Olson v. Toy (1996) 46 Cal.App.4th 818, 823 [for purposes of demurrer, we accept these allegations as true].)

Accordingly, the demurrer to the third cause of action on the ground that it fails to state a claim is OVERRULED.

Fourth Cause of Action: Corporate Veil Piercing – Alter Ego

The fourth cause of action is for “corporate veil piercing – alter ego.”

“Ordinarily, a corporation is regarded as a legal entity, separate and distinct from its stockholders, officers and directors, with separate and distinct liabilities and obligations. [Citations.] A corporate entity may be disregarded—the ‘corporate veil’ pierced—where an abuse of the corporate privilege justifies holding the equitable ownership of a corporation liable for the actions of the corporation. [Citation.] Under the alter ego doctrine, then, when the corporate form is used to perpetrate a fraud, circumvent a statute, or accomplish some other wrongful or inequitable purpose, the courts will ignore the corporate entity and deem the corporation’s acts to be those of the persons or organizations actually controlling the corporation, in most instances the equitable owners. [Citations.] The alter ego doctrine prevents individuals or other corporations from misusing the corporate laws by the device of a sham corporate entity formed for the purpose of committing fraud or other misdeeds. [Citation.]” (Sonora Diamond Corp. v. Super. Ct. (2000) 83 Cal.App.4th 523, 538.)
Here, the FAC alleges defendant Brewer is liable as the alter ego of FNC for its actions to empty out the escrow account that Plaintiff could use to satisfy the Judgment. (FAC at ¶¶ 43, 45.) The sole argument raised on demurrer is that the alter ego claim is not viable as the prior claims do not state a valid cause of action. (See Memo of P’s & A’s at p. 8.) As stated above, the Court overruled the demurrer to the second and third causes of action and thus the fourth cause of action for alter ego remains viable.

Therefore, the demurrer to the fourth cause of action on the ground that it fails to state a claim is OVERRULED.

In light of the Court’s sustaining the demurrer in part with leave to amend, the hearing on December 18, 2018 on Plaintiff’s motion for summary judgment is premature, and is ordered off calendar.

The Court will prepare the Order.