Case Name: Platinum Roofing, Inc. v. Michael Stephenson, et al.

Case No.: 18CV334657

Demurer to Complaint

Factual and Procedural Background

On August 7, 2003, Platinum Roofing, Inc. (“Platinum”) filed a Chapter 11 bankruptcy (“Bankruptcy”). (Complaint, ¶10.) At that time, defendant Michael Stephenson (“Stephenson”) was the sole officer and director of Platinum and its majority shareholder. (Id.) On September 19, 2005, an order confirming plan was entered confirming Platinum’s second amended Chapter 11 plan (“Bankruptcy Plan”) which provided that Platinum would pay its various administrative claimants and would then pay its unsecured creditors 60% of their respective claims over time through annual payments of $90,000. (Complaint, ¶11.) In the ensuing years, Platinum made some payments to it unsecured creditors. (Complaint, ¶12.) Some payments included exchanges of trade services to unsecured creditors out of order rather than payments made in accordance to the Bankruptcy Plan. (Id.) Platinum left several significant unsecured creditors unpaid entirely. (Id.)

On April 21, 2015, PRI Acquisition Corporation (“PRI”) was formed for the sole purpose of purchasing all of defendant Stephenson’s shares of Platinum Roofing, Inc. (“Platinum”). (Complaint, ¶¶2 and 6.) On May 8, 2015, PRI purchased all of the outstanding stock of Platinum from defendant Stephenson for approximately $5,000,000 pursuant to a Stock Purchase Agreement (“Agreement”). (Complaint, ¶¶6 and 13 and Exh. 1.) Also on May 8, 2015, PRI merged into Platinum with each share of PRI stock converted into one share of Platinum. (Id.) Platinum continued in existence and PRI’s shareholders became the direct owners and shareholders of Platinum. (Id.) Platinum became the successor-in-interest to PRI’s claims, duties, and rights. (Id.0

Prior to the purchase of Platinum stock, PRI was provided certain financial documents by defendant Stephenson including a balance sheet of Platinum indicating all of Platinum’s claims, debts and potential obligations (“Balance Sheet”). (Complaint, ¶14.) Defendant Stephenson did not disclose the Bankruptcy or the Bankruptcy Plan to PRI and defendant Stephenson did not make any indications that Platinum was subjected to bankruptcy proceedings or that it had any outstanding debt arising out or relating to the Bankruptcy or the Bankruptcy Plan. (Complaint, ¶¶15 – 19.) Defendant Stephenson intentionally removed any indication in Platinum’s financial records of the Bankruptcy, the Bankruptcy Plan, or any debts and obligations that were subject to them. (Complaint, ¶21.)

PRI conducted its own due diligence prior to purchasing defendant Stephenson’s stock and asked defendant Stephenson to provide all legal documents pertaining to Platinum, but defendant Stephenson failed to furnish any documents regarding the Bankruptcy, the Bankruptcy Plan or any debts and obligations that were subject to them. (Complaint, ¶20.)

Plaintiff Platinum did not discover the existence of the Bankruptcy, the Bankruptcy Plan, the liabilities of Platinum pursuant to the Bankruptcy Plan, or that Platinum may be obligated to pay debts subject to the Bankruptcy Plan until the fall of 2015, after a creditor named in the Bankruptcy Plan made a claim for its debt from Platinum. (Complaint, ¶¶22 – 23.) Platinum has attempted to find out what payments were made to any creditors of the Bankruptcy Plan and what debts are still outstanding, but defendant Stephenson refused and failed to provide Platinum a full and complete accounting of those debts. (Complaint, ¶24.) It was not until mid-2017 that Platinum discovered the fact that Stephenson provided Platinum with a falsified Balance Sheet and deliberately concealed the Bankruptcy/ Bankruptcy Plan. (Complaint, ¶26.)

Section 2.04 of the Agreement provides for a post-closing adjustment requiring defendant Stephenson to pay the difference to Platinum in the event the Working Capital Adjustment is a negative amount and the absolute amount of the Working Capital Adjustment is in excess of the Working Capital Holdback Amount. (Complaint, ¶27.) Based on calculations of the Working Capital Adjustment and Working Capital Holdback Amount, defendant Stephenson was obligated to pay Platinum approximately $150,000. (Complaint, ¶28.) Platinum made multiple demands to defendant Stephenson to pay this amount but defendant Stephenson has not paid. (Complaint, ¶29.)

On September 11, 2018, plaintiff Platinum filed a complaint against defendant Stephenson asserting causes of action for:

(1) Breach of Contract
(2) Breach of the Covenant of Good Faith and Fair Dealing
(3) Fraud – Intentional Misrepresentation
(4) Fraud – Concealment
(5) Negligent Misrepresentation
(6) Securities Fraud

On November 13, 2018, defendant Stephenson filed the motion now before the court, a demurrer to plaintiff Platinum’s complaint.

I. Defendant Stephenson’s demurrer to the first cause of action [breach of contract] and second cause of action [breach of the covenant of good faith and fair dealing] in plaintiff Platinum’s complaint is OVERRULED.

Initially, defendant Stephenson demurs to plaintiff Platinum’s first and second contract based causes of action on the ground that they are uncertain. Defendant Stephenson contends the claims are uncertain because plaintiff did not attach a copy of the contract or set out the relevant terms verbatim.

“The statement of a cause of action for breach of contract requires a pleading of (a) the contract; (b) plaintiff’s performance or excuse for nonperformance; (c) defendant’s breach; and (d) damage to plaintiff.” (4 Witkin, California Procedure (4th ed. 1997) Pleading, §482, p. 574; Roth v. Malson (1998) 67 Cal.App.4th 552, 557.) “A written contract is usually pleaded by alleging its making and then setting it out verbatim (‘in haec verba’) in the body of the complaint or as a copy attached and incorporated by reference. (Id. at §479, p. 572.) If the contract is written, “the terms must be set out verbatim in the body of the complaint or a copy of the written instrument must be attached and incorporated by reference.” (Otworth v. Southern Pacific Transportation Co. (1985) 166 Cal.App.3d 452, 459.) Alternatively, “[i]n an action based on a written contract, a plaintiff may plead the legal effect of the contract rather than its precise language.” (Construction Protective Services, Inc. v. TIG Specialty Ins. Co. (2002) 29 Cal.4th 189, 199.) “This is more difficult, for it requires a careful analysis of the instrument, comprehensiveness in statement, and avoidance of legal conclusions, and it involves the danger of variance where the instrument proved differs from that alleged; it is not frequently employed. Nevertheless, it is an established method.” (4 Witkin, California Procedure (4th ed. 1997) Pleading, §480, p. 573.)

The complaint filed by plaintiff Platinum attaches a copy of the Agreement and sets forth verbatim the three particular sections that plaintiff Platinum contends defendant Stephenson breached, sections 2.04, 3.07, and 3.22. (See Complaint, ¶¶16, 18, and 27.) Defendant Stephenson asserts that the Agreement plaintiff Platinum attached is incomplete and asks the court to take judicial notice of what defendant Stephenson asserts is the complete Agreement. The court does not find defendant Stephenson’s asserted complete version of the Agreement necessary in ruling on the demurrer since the relevant provisions of the Agreement have been adequately set forth in the complaint. (See Duarte v. Pacific Specialty Insurance Company (2017) 13 Cal.App.5th 45, 51, fn. 6—denying request where judicial notice is not necessary, helpful or relevant.) Accordingly, defendant Stephenson’s request for judicial notice in support of demurrer to complaint is DENIED as to Exhibit 1.

Defendant Stephenson continues this line of reasoning to argue that the alleged breach of section 2.04 of the Agreement is uncertain. However, the court views defendant Stephenson’s argument to be an attack on either plaintiff Platinum’s interpretation of the language of that particular provision or plaintiff Platinum’s assertion of performance/ breach. In either case, the complaint is not made uncertain by plaintiff Platinum’s failure to include the complete Agreement. Defendant Stephenson’s request for judicial notice in support of demurrer to complaint is DENIED as to Exhibit 2.

Defendant Stephenson argues next that plaintiff Platinum has not adequately alleged any injury arising from the failure to disclose the Bankruptcy in breach of sections 3.07 and 3.22 of the Agreement. The court need not reach the merits of this argument because plaintiff Platinum alleges not just a breach of sections 3.07 and 3.22, but also a breach of section 2.04. With regard to a breach of section 2.04 of the Agreement, plaintiff Platinum adequately alleges defendant Stephenson’s failure to pay $150,000. This is an adequate allegation of injury. Defendant Stephenson’s argument addresses only a portion of the cause of action. A defendant cannot demur to a portion of a cause of action. (See Financial Corp. of America v. Wilburn (1987) 189 Cal.App.3d 764, 778—“[A] defendant cannot demur generally to part of a cause of action;” see also PH II, Inc. v. Superior Court (1995) 33 Cal.App.4th 1680, 1682—“A demurrer does not lie to a portion of a cause of action;” Pointe San Diego Residential Community, L.P. v. Procopio, Cory, Hargreaves & Savitch, LLP (2011) 195 Cal.App.4th 265, 274—“ A demurrer challenges a cause of action and cannot be used to attack a portion of a cause of action.”)

Finally, defendant Stephenson demurs to the contract causes of action on the ground that plaintiff has not adequately alleged performance. “The plaintiff cannot enforce the defendant’s obligation unless the plaintiff has performed the conditions precedent imposed on him. [Citation.] Accordingly, the allegation of performance is an essential part of his cause of action. [Citation.]” (4 Witkin, California Procedure (4th ed. 1997) Pleading, §491, pp. 581 – 582.) “But the foregoing requirement is reduced to a mere formality by [Code Civ. Proc., §457] which makes it unnecessary to set forth the facts of such performance: The plaintiff may allege, in general terms, that he has ‘duly performed all the conditions on his part.’” (Id. at p. 582.)

Code of Civil Procedure section 457 states, “In pleading the performance of conditions precedent in a contract, it is not necessary to state the facts showing such performance, but it may be stated generally that the party duly performed all the conditions on his part, and if such allegation be controverted, the party pleading must establish, on the trial, the facts showing such performance.”

Here, plaintiff Platinum has made the requisite allegation at paragraph 32—“Before the purchase of Stephenson’s stock, PRI (now Platinum) performed all of their obligations under the Agreement, including but not limited to paying $5,000,000 to Stephenson and hiring Stephenson in exchange for all of his shares.” Defendant Stephenson asks this court to take judicial notice of a Notice of Labor Commissioner Hearing dated July 23, 2018 and Labor Commissioner Ruling dated October 15, 2018 to contradict plaintiff’s factual allegation of performance. Defendant Stephenson’s request for judicial notice in support of demurrer to complaint is DENIED as to Exhibits 3 – 4. The court does not find the Labor Commissioner documents to contradict plaintiff Platinum’s allegation of performance as minimally required by Code of Civil Procedure section 457.

Accordingly, defendant Stephenson’s demurrer to the first and second causes of action in plaintiff Platinum’s complaint on the ground that the pleading does not state facts sufficient to constitute a cause of action [Code Civ. Proc., §430.10, subd. (e)] and on the ground that the pleading is uncertain [Code Civ. Proc., §430.10, subd. (f)] is OVERRULED.

II. Defendant Stephenson’s demurrer to the third cause of action [fraud – intentional misrepresentation], fourth cause of action [fraud – concealment], and fifth cause of action [negligent misrepresentation] in plaintiff Platinum’s complaint is OVERRULED.

“Where the dates alleged in the complaint show the action is barred by the statute of limitations, a general demurrer lies.” (Weil & Brown et al., CAL. PRAC. GUIDE: CIV. PRO. BEFORE TRIAL (The Rutter Group 2018) ¶7:50, p. 7(I)-31 citing Saliter v. Pierce Bros. Mortuaries (1978) 81 Cal.App.3d 292, 300, et al.) However, “[t]he running of the statute must appear ‘clearly and affirmatively’ from the dates alleged. It is not sufficient that the complaint might be barred. If the dates establishing the running of the statute of limitations do not clearly appear in the complaint, there is no ground for general demurrer. The proper remedy ‘is to ascertain the factual basis of the contention through discovery and, if necessary, file a motion for summary judgment.’” (Roman v. County of Los Angeles (2000) 85 Cal.App.4th 316, 324 – 325; internal citations omitted.)

Defendant Stephenson contends the fraud causes of action are barred by the three year statute of limitations. Code of Civil Procedure section 338, subdivision (d) specifies a three year statute of limitations for actions grounded in fraud or mistake. Code of Civil Procedure section 338, subdivision (d) also specifically states, “The cause of action … is not to be deemed to have accrued until the discovery, by the aggrieved party, of the facts constituting the fraud or mistake.” (Code Civ. Proc. §338, subd. (d).)

By his own acknowledgment, the complaint here alleges plaintiff Platinum did not discover the existence of the Bankruptcy, the Bankruptcy Plan, the liabilities of Platinum pursuant to the Bankruptcy Plan, or that Platinum may be obligated to pay debts subject to the Bankruptcy Plan until the fall of 2015, after a creditor named in the Bankruptcy Plan made a claim for its debt from Platinum. (Complaint, ¶¶22 – 23; emphasis added.) Defendant Stephenson’s argument relies upon the court taking judicial notice of a Working Capital Agreement between the parties. In that Working Capital Agreement, defendant Stephenson contends plaintiff Platinum expressly stated it knew of the Bankruptcy and a potential creditor claim no later than September 3, 2015 and plaintiff did not file the instant action until September 11, 2018, beyond the three year statute of limitations. As indicated above, the court declines to take judicial notice of the Working Capital Agreement. Even if the court had taken judicial notice of the Working Capital Agreement, the court does not agree with defendant Stephenson’s assertion that plaintiff knew of the Bankruptcy no later than September 3, 2015.

Defendant Stephenson argues additionally that the fraud causes of action lack the requisite specificity. “The elements of fraud, which give rise to the tort action for deceit, are (a) misrepresentation (false representation, concealment, or nondisclosure); (b) knowledge of falsity (or ‘scienter’); (c) intent to defraud, i.e., to induce reliance; (d) justifiable reliance; and (e) 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 Lazar court did not comment on how these particular allegations met the requirement of pleading with specificity in a fraud action, but the court did say that “this 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 p. 645.)

… Less specificity should be required of fraud claims “when ‘it appears from the nature of the allegations that the defendant must necessarily possess full information concerning the facts of the controversy,’ [citation]; ‘[e]ven under the strict rules of common law pleading, one of the canons was that less particularity is required when the facts lie more in the knowledge of the opposite party….’ ” (Id. at p. 217, 197 Cal.Rptr. 783, 673 P.2d 660.) Also “considerations of practicality enter in,” when multiple plaintiffs and defendants are involved. (Ibid.)

(Alfaro v. Community Housing Improvement System & Planning Assn., Inc. (2009) 171 Cal.App.4th 1356, 1384 (Alfaro).)

As recognized in Alfaro, a plaintiff cannot plead concealment with specificity since a plaintiff would not know “how” or “by what means” something didn’t happen, or “when” it never happened, or “where” it never happened.

Defendant Stephenson takes issue with the lack of specificity with regard to allegations pertaining to damage. Defendant Stephenson asserts there are no longer any creditors so there is no injury. However, this is an assertion of extrinsic evidence that the court does not consider in ruling on a demurrer. Plaintiff has alleged, at paragraph 22 of the complaint, that “a creditor named in the Bankruptcy Plan made a claim for its debt from Platinum.” The court is not persuaded by defendant Stephenson’s contention that the fraud causes of action lack the requisite specificity.

Accordingly, defendant Stephenson’s demurrer to the third through fifth causes of action in plaintiff Platinum’s complaint on the ground that the pleading does not state facts sufficient to constitute a cause of action [Code Civ. Proc., §430.10, subd. (e)] and on the ground that the pleading is uncertain [Code Civ. Proc., §430.10, subd. (f)] is OVERRULED.

III. Defendant Stephenson’s demurrer to the sixth cause of action [securities fraud] in plaintiff Platinum’s complaint is SUSTAINED.

Plaintiff Platinum’s sixth cause of action is specifically premised upon a violation of Corporations Code section 25401 which states, “It is unlawful for any person to offer or sell a security in this state, or to buy or offer to buy a security in this state, by means of any written or oral communication that includes an untrue statement of a material fact or omits to state a material fact necessary to make the statements made, in the light of the circumstances under which the statements were made, not misleading.”

Defendant Stephenson contends the statute of limitations for a violation of Corporations Code section 25401 is two years pursuant to Corporations Code section 25506, subdivision (b). That section states:

For proceedings commencing on or after January 1, 2005, no action shall be maintained to enforce any liability created under Section 25500, 25501, or 25502 (or Section 25504 or Section 25504.1 insofar as they related to those sections) unless brought before the expiration of five years after the act or transaction constituting the violation or the expiration of two years after the discovery by the plaintiff of the facts constituting the violation, whichever shall first expire.

Since plaintiff alleges it discovered the existence of the Bankruptcy in the fall of 2015, but did not file this complaint until September 11, 2018, defendant Stephenson contends the sixth cause of action for securities fraud is barred. In opposition, plaintiff Platinum contends the cause of action did not accrue until mid-2017 when it discovered the fact that Stephenson provided it with a falsified Balance Sheet and deliberately concealed the Bankruptcy/ Bankruptcy Plan. (Complaint, ¶26.)

With respect to torts, generally speaking, a claim accrues and the statute of limitations begins to run upon the occurrence of the last event essential to the cause of action, even if the plaintiff is unaware that a cause of action exists. The infliction of actual and appreciable harm will commence the limitations period. However, the discovery rule postpones commencement of the limitation period until the plaintiff discovers or should have discovered the facts essential to his cause of action. Under this rule, possession of ‘presumptive’ as well as ‘actual’ knowledge will commence the running of the statute. A plaintiff is charged with ‘presumptive’ knowledge so as to commence the running of the statute once he or she has notice or information of circumstances to put a reasonable person on inquiry, or has the opportunity to obtain knowledge from sources open to his investigation.

(Shamsian v. Atlantic Richfield Co. (2003) 107 Cal.App.4th 967, 979 – 980; internal citations and punctuation omitted.)

Under the discovery rule, the statute of limitations begins to run when the plaintiff suspects or should suspect that her injury was caused by wrongdoing, that someone has done something wrong to her. The limitations period begins once the plaintiff has notice or information of circumstances to put a reasonable person on inquiry. A plaintiff need not be aware of the specific ‘facts’ necessary to establish the claim; that is a process contemplated by pretrial discovery. Once the plaintiff has a suspicion of wrongdoing, and therefore an incentive to sue, she must decide whether to file suit or sit on her rights. So long as a suspicion exists, it is clear that the plaintiff must go find the facts; she cannot wait for the facts to find her.

(Mills v. Forestex Co. (2003) 108 Cal.App.4th 625, 642 – 643.)

In opposition, plaintiff Platinum argues it did not discover defendant Stephenson’s falsification of the balance sheet and concealment of the bankruptcy until mid-2017 as alleged at paragraph 26 of the complaint. However, if the alleged securities fraud consists of concealment of the bankruptcy (omission of a material fact), then plaintiff Platinum’s alleged discovery of the existence of the bankruptcy in the Fall of 2015 triggered the limitations period. The two year limitation period set forth in Corporations Code section 25506, subdivision (b) expired in the Fall of 2017.

Accordingly, defendant Stephenson’s demurrer to the sixth cause of action in plaintiff Platinum’s complaint on the ground that the pleading does not state facts sufficient to constitute a cause of action [Code Civ. Proc., §430.10, subd. (e)] is SUSTAINED with 10 days’ leave to amend.