Tentative Rulings

Case Number: BC630062    Hearing Date: February 14, 2020    Dept: 50

THE COURT NEEDS ADDITIONAL TIME TO COMPLETE ITS REVIEW OF THE ISSUES RAISED AT THE LAST HEARING.  THE TWO MOTIONS AND THE TRIAL SETTING CONFERENCE ARE CONTINUED TO MARCH 11, 2020 AT 8:30 A.M. IN DEPT. 50.  PLAINTIFFS ARE ORDERED TO GIVE NOTICE..

Case Number: BC630062    Hearing Date: January 28, 2020    Dept: 50

THERE ARE TWO TENTATIVES POSTED:

Superior Court of California

County of Los Angeles

Department 50

Background

This action was filed on August 9, 2016 by Plaintiff Fraser Ross (“Ross”) against Christopher Lee (“Lee”). Defendants Spencer Spirit Holdings Inc. (“Spencer”), BHK Investments, LLC (“BHK”), Salus Capital Partners, LLC (“Salus”), and HGI Asset Management Holdings, LLC (“HGI”) (collectively, the “Lenders”) were later added as defendants, and A-List, Inc. (“A-List”) and H-List, Inc. (“H-List”) were later added as plaintiffs. Lee was dismissed from the case on September 4, 2018. Plaintiffs’ operative Third Amended Complaint (“TAC”) was filed on August 31, 2018.

Ross is the founder and creator of the Kitson-brand boutiques. (TAC ¶ 1.) In 2012, Ross suffered a life-threatening illness that left him in a coma and required years of recovery. (TAC, ¶ 1.) Ross alleges that Kitson’s lenders, Salus and BHK, seized upon his illness to steal his money and ruin his business. (TAC, ¶ 1) Ross alleges that he was induced by Kitson’s lenders into loaning Kitson $2 million of his personal funds to pay down Kitson’s line of credit with Salus. (TAC, ¶ 2.) Then, they tricked him into entering into an agreement which waived his right to be repaid on that loan. (TAC, ¶ 2.) Next, despite a clear conflict of interest, the lenders took operational control of Kitson, and began a fraudulent scheme to “pump and dump;” namely, they stockpiled excess inventory just weeks before closing the company down, refused to pay the vendors who sold them the inventory, and liquidated the inventory, making a profit. (TAC, ¶¶ 3-4.)

On October 16, 2018, Salus and HGI filed a cross-complaint against A-List, H-List, and Lee (“Salus XC”). On October 23, 2018, Spencer and BHK filed a cross-complaint against Ross, A-List, and H-List (“BHK XC”). On October 24, 2018, Spencer and BHK filed a third-party complaint against Lee (“BHK 3PC”).

Ross, A-List, H-List, and Lee (collectively, the “Kitson Parties”) now move for summary adjudication of the following causes of action:

1. In the Salus XC: the first cause of action for breach of contract against A-List and H-List;

2. In the BHK XC, the first cause of action for breach of contract against A-List and H-List, the second cause of action for conversion against Ross, A-List, and H-List, the third cause of action for fraud against Ross, A-List, and H-List, and the fourth cause of action for unjust enrichment against Ross;

3. In the BHK 3PC, the first cause of action for breach of contract against Lee, the second cause of action for fraud against Lee, and the third cause of action for unjust enrichment against Lee.

Salus, HGI, BHK, and Spencer oppose.[1]

Evidence

The Court rules on the Kitson Parties’ evidentiary objections as follows:

Objections 1-5, 8-17, 20, and 22 are overruled

Objections 6-7, 18-19, 21, 23-27 are sustained

The Kitson Parties also object to the Lenders’ raising unpleaded theories or facts in their opposition to the motion for summary adjudication. The Court declines to rule on these objections as they are not based on evidence, but the Court will address them to the extent that these objections are relevant or material to the parties’ substantive arguments below.

Legal Standard

“[A] motion for summary judgment shall be granted if all the papers submitted show that there is no triable issue as to any material fact and that the moving party is entitled to a judgment as a matter of law.” ((Code Civ. Proc., § 437c, subd. (c).) The moving party bears the initial burden of production to make a prima facie showing that there are no triable issues of material fact. ((Aguilar v. Atlantic Richfield Co. (2001) 25 Cal.4th 826, 850.) If the moving party carries this burden, the burden shifts to the opposing party to make a prima facie showing that a triable issue of material fact exists. (Ibid.) Courts “liberally construe the evidence in support of the party opposing summary judgment and resolve doubts concerning the evidence in favor of that party.” ((Dore v. Arnold Worldwide, Inc. (2006) 39 Cal.4th 384, 389.)

When a defendant seeks summary judgment, he/she must show either (1) that one or more elements of the cause of action cannot be established; or (2) that there is a complete defense to that cause of action. ((Code Civ. Proc., § 437c, subd. (p)(2).)

Discussion

Authority to File MSA for Kitson

As a threshold matter, the Lenders contend that neither Ross nor Lee have the authority to direct Kitson to file this motion, and therefore, summary adjudication as to Kitson must be denied. But the Lenders have offered no evidence of either Ross or Lee’s purported lack of authority, and citing to the Court’s August 29, 2019 order on the Lenders’ motion for summary judgment/adjudication does not suffice as evidence. Further, the Lenders have presented no controlling authority for the proposition that a motion for summary adjudication that is not authorized by a “duly authorized representative” of a company is a ground for denial.

Allegations of the Salus XC

Ross founded Kitson in 2000. (Salus XC, ¶ 9.) Ross hired Lee to serve as Kitson’s CEO in August 2011. (Salus XC, ¶ 9.) In 2013, Lee approached Salus to finance Kitson’s growth initiative. (Salus XC, ¶ 10.) On May 13, 2013, Salus entered into a credit agreement with Kitson, under the terms of which Salus established a senior secured credit facility in the maximum principal amount of $15 million, including a $10 million revolving line of credit and a $5 million term loan (the “Credit Agreement”). (Salus XC, ¶ 11, Ex. A.) The Credit Agreement was secured by, among other things, a first priority security interest in all or substantially all of Kitson’s assets, including its inventory (the “Security Agreement”). (Salus XC, ¶ 12, Ex. B.)

Through 2015, Kitson’s business continued to falter, so Salus allowed Kitson to borrow additional amounts under the Credit Agreement. (Salus XC, ¶ 14.) The Credit Agreement was amended seven times between February 24, 2014 and August 7, 2015. (Salus XC, ¶ 14.) Unknown to Salus and in violation of the terms of the Credit Agreement, on January 5, 2015, Lee executed a promissory note on behalf of Kitson to evidence a $2 million loan from Ross to Kitson (the “$2 Million Loan”). (Salus XC, ¶ 15, Ex. D.) The loan was funded in February 2015. (Salus XC, ¶ 15.) In early spring 2015, Salus discovered that Kitson was $1.3 million past due with regard to the payment of sales taxes in California and Nevada. (Salus XC, ¶ 16.) On or about April 1, 2015, Salus learned of the $2 Million Loan. (Salus XC, ¶ 16.) On April 2, 2015, Salus delivered to Kitson a Notice of Default. (Salus XC, ¶ 17, Ex. E.) The Notice of Default was based on Kitson’s failure to pay taxes, the incursion of additional debt, and Kitson’s failure to inform Salus that Kitson had been sued by third parties. (Salus XC, ¶ 17.) To remedy the default, Salus demanded that Kitson execute a subordination agreement with respect to the $2 Million Loan, and a Subordination Agreement was subsequently signed by Kitson and Ross as of April 14, 2015. (Salus XC, ¶ 18, Ex. F.)

Also, in April 2015, Ross and Lee reached an agreement under which Ross agreed to sell certain shares of Kitson to Lee, and thereafter, to resign as an officer and director of the company. Ross signed the documents necessary to effectuate the transaction and resigned as an officer and director of Kitson. (Salus XC, ¶ 19.) In early 2015, because of Kitson’s continued poor performance, Salus informed Kitson that it would need to raise a minimum of $4 million of incremental capital while also commencing to prepare for a potential bankruptcy filing. (Salus XC, ¶ 20.) Spencer emerged as a strategic investor and offered $4 million of incremental capital to Kitson. (Salus XC, ¶ 20.) While negotiations with Spencer were proceeding, Kitson prepared for a possible Chapter 11 bankruptcy filing. (Salus XC, ¶ 21.) Kitson initiated a warehouse sale to liquidate aged inventory and to generate cash. Kitson also began to increase its new inventory so that it could draw more under the Salus line of credit. (Salus XC, ¶ 21.)

The bankruptcy was staved off when an agreement was reached with Spencer. (Salus XC, ¶ 22.) On May 15, 2015, Kitson (acting through Lee), Salus, and BHK (a special purpose entity formed by Spencer) entered into a Waiver, Joinder and Sixth Amendment to Credit Agreement under which BHK joined the Credit Agreement by providing a $4 million advance to Kitson (the “Sixth Amendment”). (Salus XC, ¶ 22.) On November 6, 2015, Kitson hired James Wong as Chief Restructuring Officer. (Salus XC, ¶ 23.) Mr. Wong engaged liquidators to conduct store closing and other sales at various Kitson stores. (Salus XC, ¶ 24.) Kitson ultimately opted to enter into an Assignment for the Benefit of Creditors (“ABC”) in December 2015. (Salus XC, ¶¶ 26-27.) Winter Harbor, LLC (“Winter Harbor”) was designated the assignee to take title to the assets of the company, liquidate those assets, and oversee all matters relating to the wind-down of Kitson’s business. (Salus XC, ¶ 27.) The ABC was executed by Mr. Wong on behalf of A-List and H-List, and became effective on December 12, 2015. (Salus XC, ¶ 28.) Contemporaneously with the assignment, Winter Harbor and Salus entered into a Funding Agreement pursuant to which Salus agreed to advance funds to Winter Harbor in order to fund the wind-down. (Salus XC, ¶ 30.) After the wind-down, Salus was still owed $3.5 million. (Salus XC, ¶ 31.)

On October 20, 2016, Winter Harbor, as assignee, filed a lawsuit against Salus alleging that Salus breached the Funding Agreement. (Salus XC, ¶ 32.) The case was settled on February 16, 2017. (Salus XC, ¶ 32.) The settlement included a general release. (Salus XC, ¶ 32.)

Allegations of the BHK XC and BHK 3PC

The basic background facts of BHK’s Cross-Complaint and Third Party Complaint are essentially the same as those alleged in Salus’s Cross-Complaint. Additionally, BHK alleges that as a condition of BHK’s agreement to infuse capital into Kitson, on or about May 15, 2015, Ross entered into a Consulting Agreement with A-List agreeing to provide full-time merchandising, marketing, and store design services to A-List. (BHK XC, ¶ 36.) Ross also agreed not to compete with Kitson or to accept any employment or engagements that would create a conflict of interest for Ross. (BHK XC, ¶ 36.) As another condition of BHK’s agreement to infuse capital into Kitson, on or about May 15, 2015, Lee entered into a Stockholders Agreement, pursuant to which Lee agreed that he would be divested of all shares of common stock held by Lee in the event of Lee’s termination from A-List. (BHK XC, ¶ 38; BHK 3PC, ¶ 27.) BHK infused an additional $1 million into Kitson on or about August 17, 2015 and an additional $1.5 million on or about September 25, 2015 (jointly, the “Last Out Advance Notes”). (BHK XC, ¶ 43, Exs. B, C.) The $6.5 million (and its accrued and capitalized interest) have not been repaid. (BHK XC, ¶ 45.)

BHK’s Fraud Causes of Action

BHK’s causes of action for fraud against the Kitson Parties are based on two theories of fraud—the first is one based on concealment, with allegations that the Kitson Parties fraudulently concealed material information from BHK, and the second is one based on false promise, with allegations that the Kitson Parties fraudulently induced BHK into loaning Kitson money.

First, in support of the “fraudulent concealment” theory, BHK alleges that neither Ross nor Lee disclosed to BHK or Spencer “the fraud scheme as outlined in the prior iterations of Ross’ Complaints filed in this action, including but not limited to the Second Amended Complaint, before BHK infused [] additional capital into Kitson.” (BHK XC, ¶ 66 and BHK 3PC, ¶ 47; see also BHK XC, ¶ 16 and BHK 3PC, ¶ 14 [“. . . during Lee’s and Ross’ control of Kitson, each intentionally concealed his actions from BHK so as to induce BHK to infuse capital into Kitson . . . .”]; BHK 3PC, ¶ 65 [alleging that Lee and Ross failed to disclose “any of their actions which drove, and continued to drive, Kitson into financial ruin and place Kitson at the dire financial position it was in at the time that BHK infused capital into Kitson”].) BHK alleges that Ross and Lee conspired to use the capital infused by BHK for their personal benefit “to free Kitson from the massive debt they had incurred for Kitson” (BHK XC, ¶ 13 and BHK 3PC, ¶ 11; BHK XC, ¶ 13; see also BHK XC, ¶ 24 and BHK 3PC, ¶ 21 [“…to avoid personal liability and bankruptcy for the sales tax obligations of Kitson, and the massive debt of Kitson created by Ross and Lee, and to avoid defaulting on Salus’ line of credit, Lee, with Ross’ consent, knowledge and approval and ratification, convinced BHK . . . to infuse an initial $4 million into Kitson”].)

The elements of an action for fraud based on concealment are: “(1) the defendant must have concealed or suppressed a material fact, (2) the defendant must have been under a duty to disclose the fact to the plaintiff, (3) the defendant must have intentionally concealed or suppressed the fact with the intent to defraud the plaintiff, (4) the plaintiff must have been unaware of the fact and would not have acted as he did if he had known of the concealed or suppressed fact, and (5) as a result of the concealment or suppression of the fact, the plaintiff must have sustained damage.” ((Marketing West, Inc. v. Sanyo Fisher Corp. (1992) 6 Cal.App.4th 603, 612-613.)

The Kitson Parties contend that the concealment claim is without merit because (1) some of the allegedly concealed facts were not concealed, (2) some of the allegedly concealed facts are not facts that Ross or Lee had a duty to disclose, and (3) none of the allegedly concealed facts could have been the immediate cause of BHK’s decision to lend money to Kitson.

As set forth in BHK’s responses to A-List’s Special Interrogatories, BHK contends that the Kitson Parties (namely, Lee and Ross[2]) concealed the following facts both in advance of BHK makings its initial loan in May 2015 and in advance of BHK making additional loans in August 2015 and September 2015:

1. Ross suffered from physical, physiological or emotional issues that impacted his ability to properly and appropriately participate in the management and operation of Kitson, or that impacted his ability to properly and appropriately understand contracts and other agreements entered into by Kitson or by him, including the Sixth Amendment and the Consulting Agreement.

2. Lee manipulated and was manipulating Ross into believing that Kitson could grow, or that Lee had represented to Ross that Lee could grow Kitson.

3. Ross contended that Lee defrauded Ross into making a $2 million loan to Kitson.

4. Lee caused Kitson and Ross to reject an offer allegedly received from Tengram.

5. In or about April 2015, Ross was suffering from a life-threatening illness, Ross did not have the capacity to work, and Ross should not be placed under stress.

6. On or about April 13, 2015, Ross was advised by a physician as to that fact that he was suffering from a life-threatening illness, that he did not have the capacity to work, and that he should not be placed under stress.

7. On or about April 13, 2015, at the time Ross was presented with documents to sign, including the assignment by Ross to Lee of his shares in Kitson and Ross’ resignation as an officer and director of Kitson, Ross was heavily medicated, lacked the capacity to enter into binding agreements, and did not have independent counsel to review the documents and represent his interests.

8. Ross claimed that Lee presented to Ross only the signature page to the Consulting Agreement, and only did so after providing Ross with sleep medication.

9. Ross claimed he signed the Consulting Agreement in an inebriated condition, and without access to the actual terms of the Consulting Agreement.

10. Ross contends that Lee defrauded Ross into waiving his right to repayment of his $2 million loan to Kitson.

11. Lee had engaged in conduct such as foregoing opportunities and benefits to Kitson, hiring unqualified employees, hiring employees with personal affiliations to Lee, engaging in self-dealing transactions, providing himself with improper and unauthorized salary and personal expenses.

12. Ross and Lee knew about the above conduct and/or Ross suspected that Lee had engaged in such conduct. (A. Khan Decl., Ex. 806, Response to Interrogatory No. 15.)

As to Statements 3, 7, 8, 9, and 10, the Kitson Parties argue that these are not actionable because Lee did not know of these claims and contentions until well after he had resigned from Kitson in September 2015. (Kitson Parties’ Undisputed Material Fact (“UMF”) 40-44.) In other words, Lee could not have concealed facts from BHK if he was unaware of those same facts at the material times. In response, BHK argues that Lee’s knowledge is immaterial. (Responses to UMF 40-44.) But it is unclear why Lee’s knowledge is immaterial when (a) the fraudulent concealment claim is asserted against him (see BHK 3PC, ¶¶ 59-67) and (b) BHK does not dispute that its responses to the Special Interrogatories comprise “all of its contentions regarding Lee and Ross’s alleged fraud” (see UMF 39). BHK does not otherwise offer any evidence that Lee did, in fact, have knowledge about Ross’s state of mind as set forth in Statements 3, 8, 9, and 10.

As to Statement 7, the Court notes that it is not a fact about Ross’s state of mind but a fact about Ross’s “state of being” (i.e., he was heavily medicated, lacked the capacity to enter into binding agreements, and did not have independent counsel to review the documents and represent his interests). Therefore, the fact that Lee did not know that Ross “suspected or claimed” that he was heavily medicated, that he lacked the capacity to enter into binding agreements, and that he did not have independent counsel does not answer the question of what Lee knew at the material times so that he could disclose those facts to BHK. (UMF 41.)

As to Ross, the Kitson Parties argue that Statements 3, 7, 8, 9, and 10 are merely allegations he made against Lee in the original unverified complaint filed in this case. (UMF 45-48.) Although not explicitly argued in these terms, the implication is that the nature of Ross’s claims means that Ross could not have known of his contentions about Lee’s conduct at the time they were occurring. For example, if Lee had been improperly medicating Ross, Ross could not have known that (and thus, could not have disclosed that to BHK) precisely because Ross was inebriated as a result. While BHK is correct in arguing that Ross’s allegations in his original complaint are binding as to him, Ross does not allege in his original complaint that he knew at the time he signed the Consulting Agreement that he had been given sleep medication. (See Compl., ¶ 17.) ((Hearn Pacific Corp. v. Second Generation Roofing, Inc. (2016) 247 Cal.App.4th 117, 131-132 [“…a pleading party may be bound by the factual allegations it makes in a complaint, even if the complaint is not verified” (emphasis in original)].) Furthermore, that Ross alleged that Lee had defrauded him in the past does not mean that Ross now admits that he knew of the alleged fraud at the time the fraud was committed.

Next, the Kitson Parties contend that Statements 2, 11, and 12 are merely allegations from Ross’s unverified Second Amended Complaint, and that BHK has no evidence to support that these statements were concealed by Ross or Lee. (UMF 46-48.) However, the Court notes that the only evidence cited by the Kitson Parties in support of their contention is the Second Amended Complaint itself. (UMF 46-48.) It is worth reiterating here that a defendant moving for summary judgment or adjudication has the initial burden to show that there are no triable issues of material fact. While a defendant can meet this burden by presenting evidence “that the plaintiff does not possess, and cannot reasonably obtain, needed evidence,” actual evidence is still required, typically in the form of “admissions by the plaintiff following extensive discovery to the effect that he has discovered nothing.” (Aguilar v. Atlantic Richfield Co., supra, 25 Cal.4th at pp. 854-855.) In other words, a defendant cannot meet its initial burden by “simply point[ing] out that the plaintiff does not possess, and cannot reasonably obtain, needed evidence.” ((Ibid. .) Here, the Second Amended Complaint does not suffice as evidence showing that BHK does not possess and cannot reasonably obtain evidence that Ross or Lee concealed Statements 2, 11, and 12 from BHK. Therefore, a question of fact exists as to whether some of the allegedly concealed facts were, in fact, concealed from BHK. Because summary adjudication may only be granted if it completely disposes of a cause of action (Code of Civil Procedure section 437c, subdivision (f)(1)), it is not necessary for the Court to consider the Kitson Parties’ arguments as to immateriality or the existence of a duty to disclose because those arguments only concern a subset of the twelve statements.

The Kitson Parties do argue that for all twelve statements, BHK cannot establish the justifiable reliance element of the fraudulent concealment claim. ((See Alliance Mortgage Co. v. Rothwell (1995) 10 Cal.4th 1226, 1239 [“Reliance exists when the misrepresentation or nondisclosure was an immediate cause of the plaintiff’s conduct which altered his or her legal relations, and when without such misrepresentation or nondisclosure he or she would not, in all reasonable probability, have entered into the contract or other transaction.”].) The Kitson Parties submit evidence that BHK chose to enter into the Sixth Amendment with only a limited due diligence period. (UMF 28-30.) The Kitson Parties also argue that it was not possible that BHK acted in reliance on the alleged concealments in advancing the second and third loans because BHK had comprehensive oversight into Kitson’s operations from the moment it funded the initial loan. (UMF 32.) BHK appointed a director to Kitson’s board of directors. (UMF 33.) BHK also appointed an “oversight party” who was involved in the day-to-day operations of Kitson and whose purpose was to resolve any problems that could not have been identified during the due diligence period. (UMF 31, 34.) The Kitson Parties argue that none of the twelve concealed facts could have been the immediate cause of BHK’s decision to loan money to Kitson. But as the Kitson Parties themselves note, “[e]xcept in the rare case where the undisputed facts leave no room for a reasonable difference of opinion, the question of whether a plaintiff’s reliance is reasonable is a question of fact.” (Ibid.) Here, not only are most of the Kitson Parties’ facts disputed (see Response to UMF 28-32, 34), the Court does not find that this is a rare case where there is no room for a reasonable difference of opinion. Indeed, that there was a shortened due diligence period suggests that BHK made its lending decision based on representations and omissions by Ross and Lee. The Kitson Parties have not demonstrated that there is no room for a reasonable difference of opinion as to whether BHK’s reliance on Ross and Lee’s omissions was reasonable.

Second, in support of the “fraudulent inducement” theory, BHK alleges that the Kitson Parties fraudulently induced BHK into loaning money to Kitson by representing that they intended to honor and perform under the Consulting Agreement and the Stockholders Agreement and that the capital infusion from BHK would be used for the benefit of Kitson and not the personal benefit of Ross or Lee. (BHK XC, ¶ 64; BHK 3PC, ¶ 61.) With respect to Ross and the Consulting Agreement, BHK alleges that Ross had no intention of honoring or performing under the Consulting Agreement, and instead intended to engage in actions that would violate the conflict of interest provisions. (BHK XC, ¶ 37.) With respect to Lee and the Stockholders Agreement, BHK alleges that Lee did not intend to honor or perform under the Stockholders Agreement because Lee purported to improperly transfer Kitson common stock to Ross on or about July 29, 2018. (BHK 3PC, ¶¶ 44, 61.)

Among other things, the Kitson Parties argue that the fraudulent inducement claim is without merit because it is nothing more than a breach of contract claim. “[C]onduct amounting to a breach of contract becomes tortious only when it also violates a duty independent of the contract arising from principles of tort law.” ((Erlich v. Menezes (1999) 21 Cal.4th 543, 551.) “An omission to perform a contract obligation is never a tort, unless that omission is also an omission of a legal duty.” ((Ibid. .) While a contract that is fraudulently induced may support an award of tort damages, “something more than nonperformance is required to prove the defendant’s intent not to perform his promise.” ((Las Palmas Associates v. Las Palmas Center Associates (1991) 235 Cal.App.3d 1220, 1239.)

The Kitson Parties submit evidence that both Ross and Lee intended to perform under the Consulting Agreement and the Stockholders Agreement, respectively. (Lee Decl., ¶ 17; Ross Decl., ¶ 6.) BHK counters that Ross and Lee’s subsequent actions show that they did not have the intent to perform pursuant to the agreements. (Las Palmas Associates v. Las Palmas Center Associations, supra, 235 Cal.App.3d at p. 1239 [“…the subsequent conduct of a defendant, such as his failure to immediately carry out his pledge has some evidentiary value to show that a defendant made the promise without the intent to keep the obligation.”]; Tenzer v. Superscope (1985) 39 Cal.3d 18, 30 [noting that “fraudulent intent must often be established by circumstantial evidence” such as “defendant’s insolvency, his hasty repudiation of the promise, his failure even to attempt performance, or his continued assurances after it was clear he would not perform”].) BHK offers as evidence of Lee’s “hasty repudiation” of the Stockholders Agreement the fact that Lee failed to honor the “right of first refusal” provision therein when he purported to transfer his shares to Ross in July 2018. (Response to UMF 36.) The Stockholders Agreement prevented Lee from transferring any shares of his stock without BHK’s prior approval. (BHK 3PC, ¶ 31.) But as noted by the Kitson Parties, Lee’s purported “repudiation” can hardly be characterized as “hasty,” since the Stockholders Agreement was executed in 2015, and the attempted transfer took place in 2018. As far as Ross’s intent, the Kitson Parties argue that Ross could not have intended to deceive or induce BHK to loan Kitson money because his execution of the Consulting Agreement was a condition of BHK’s agreement to loan Kitson money. (BHK XC, ¶ 36.) The Kitson Parties submit evidence that Ross was not involved in the BHK transaction negotiations, and his only understanding was that he had to sign the Consulting Agreement in order for the loan to close. (UMF 24-25.) BHK counters that because Ross subsequently left his position at Kitson in October 2015, an inference can be made that he never intended to perform under the Consulting Agreement. But the Court notes that it is undisputed that Ross acted consistent with the role of consultant defined in the Consulting Agreement. (UMF 27.)

As far as the third misrepresentation at issue (that Lee and Ross would use the capital infusion for the benefit of Kitson and not for their own personal benefit), the Kitson Parties argue that the promissory fraud claim is not actionable because BHK itself alleges that the funds were used for Kitson’s benefit. (BHK XC, ¶ 35 [alleging that BHK’s money was used to pay “outstanding amounts due to vendors, rents, utilities and professional fees for debts incurred by Kitson”].) That payment of these amounts also benefited Ross and Lee personally (who are alleged to have personal liability for Kitson’s sales tax obligations) does not imply an intent to deceive. In any event, the Kitson Parties submit evidence that BHK was aware of Kitson’s tax liabilities before it executed the Sixth Amendment. (UMF 13, 16-19.) BHK does not offer any evidence in response that raises a triable issue as to the element of Ross and Lee’s intent to use BHK’s money to benefit themselves rather than Kitson. (Response to UMF 13, 16-19.) Therefore, the Court finds that BHK has not offered any evidence that raises a triable issue of fact as to Lee or Ross’s intent to perform under the contracts at issue, and accordingly, BHK has not raised a triable issue of material fact as to whether the fraudulent inducement claim is nothing more than a breach of contract claim.

The Court notes that a motion for summary adjudication may only be granted “if it completely disposes of a cause of action . . . .” ((Code Civ. Proc., § 437c, subd. (f)(1).) Here, the fraud causes of action asserted by BHK against the Kitson Parties are pleaded as one “cause of action” for “fraud/deceit, promissory fraud.” (BHK XC, p. 14:20; BHK 3PC, p. 15:2.) “Whether a complaint in fact asserts one or more causes of action for pleading purposes depends on whether it alleges invasion of one or more primary rights.” ((Hindin v. Rust (2004) 118 Cal.App.4th 1247, 1257.) A plaintiff’s primary right is “simply the plaintiff’s right to be free from the particular injury suffered,” and “must therefore be distinguished from the legal theory on which liability for that injury is premised.” (Ibid. [emphasis in original].) “[U]nder the primary rights theory, the determinative factor is the harm suffered. When two actions involving the same parties seek compensation for the same harm, they generally involve the same primary right.” ((Boeken v. Philip Morris USA, Inc. (2010) 48 Cal.4th 788, 798.) Here, BHK’s “primary right” can be construed as the right to be free from fraudulent conduct in connection with the loan transaction. And while BHK alleges multiple legal theories under which recovery for fraud can be predicated, BHK alleges only a single injury suffered—loaning $6.5 million to Kitson under false pretenses. Therefore, the Court finds that, even though BHK has failed to raise a triable issue of fact as to the fraudulent inducement theory, summary adjudication of that portion of the cause of action is improper.

Salus and BHK’s Contract Causes of Action

Salus’s first cause of action for breach of contract against A-List and H-List is based on the $3.5 million deficiency due and owing under the Credit Agreement. (Salus XC, ¶ 40.)

In support of BHK’s causes of action for breach of contract, BHK alleges that Ross, A-List, and H-List breached the Sixth Amendment (1) by failing to pay BHK the amounts due to be repaid by no later than the maturity date, (2) by misrepresentations made on their behalves, with respect to the insolvency of Kitson, and (3) by failing to repay the Last Out Advance Notes. (BHK XC, ¶¶ 52-54.) BHK alleges that Lee breached the Stockholders Agreement by failing to provide BHK with the right of first refusal of his 1,000 shares of Common Stock and by improperly transferring shares of common stock to Ross in or about late July 2018. (BHK 3PC, ¶¶ 56-57.)

The Kitson Parties argue that Salus and BHK failed to submit a verified statement of claim or “proof of claim” and have thus waived their right to recover under the Credit Agreement and Sixth Amendment. Pursuant to section 5(e) of the ABC, Winter Harbor had the power to “require all of [Kitson’s] creditors to whom any balance is owing to submit verified statements to [Winter Harbor] of said claim(s), pursuant to California Code of Civil Procedure § 1802.” (A. Khan Decl., Ex. 803 at Ex. G, § 5(e).) Section 1802 provides the procedure for creditors to submit claims “to be able to share in the distribution of proceeds of the liquidation of the assignor’s assets” after receiving notice of the ABC. ((Code Civ. Proc., § 1802, subd. (b).)

It is undisputed that Salus and BHK had notice of the ABC, and it is further undisputed that neither Salus nor BHK filed a statement of claim with Winter Harbor. (UMF 54-56.) However, BHK and Salus contend that their failure to file a statement of claim is immaterial because neither the ABC nor Code of Civil Procedure section 1802 provide that failure to submit a claim results in waiver of the claim. The Court notes that although the Kitson Parties argue in reply that the ABC requires proofs of claim “as a condition for recovery,” the Kitson Parties do not cite to any section of the ABC where this requirement is set forth. (Reply, p. 8:19-20.) The only section of the ABC cited by the Kitson Parties is section 5(e), and that section merely states that Winter Harbor has the power to require submission of statements of claims. Similarly, there is nothing in section 1802 that provides that failure to comply with the claims filing deadline bars later recovery by creditors.

The Kitson Parties next argue that Salus’s breach of contract cause of action is barred because Salus cannot claim a security interest in Kitson’s future tort recovery against Salus. The Kitson Parties point out that the Credit Agreement is secured by a first priority security interest in Kitson’s assets arising from the Security Agreement dated May 13, 2013. (UMF 2.) The Security Agreement provides that Kitson grants Salus “a lien on and security interest in[,] . . . whether not existing or hereafter arising or acquired from time to time,” “all Commercial Tort Claims . . . .” (UMF 2; Lee Decl., Ex. 146, § 2.1.) Based on this, the Kitson Parties argue that Salus is attempting to claim a secured interest in any recovery Kitson is awarded against Salus, and that such an attempt is impermissible. But as noted by Salus, even if the Kitson Parties were correct, this would not dispose of the entire breach of contract cause of action because Salus’s breach of contract claim is primarily based on Kitson’s alleged failure to repay the loans extended by Salus under the Credit Agreement. (Salus XC, ¶ 43.) Whether Salus may be barred from recovering some portion of its breach of contract claim does not render the entire breach of contract claim meritless.

Accordingly, the Court finds that the Kitson Parties have failed to meet their initial burden of showing that Salus and BHK’s breach of contract causes of action are without merit.

BHK’s Conversion Cause of Action

In support of BHK’s cause of action for conversion against Ross, A-List, and H-List, BHK alleges that Ross, A-List, and H-List came into possession of $6.5 million and wrongfully exercised control over the $6.5 million that was to be repaid to BHK by using that money “for the benefit of Ross’ personal liabilities.” (BHK XC, ¶ 59.)

The Kitson Parties argue that the conversion claim must fail as a matter of law because (1) the conversion claim is a disguised breach of contract claim, (2) the allegedly converted sum is not specific or identifiable sum, and (3) Salus had control of the funds loaned to Kitson by BHK. For the same reasons discussed in support of the promissory fraud “claim,” the Court finds that the Kitson Parties have demonstrated that BHK cannot show that Kitson (or Ross) owed BHK an independent duty separate from the duty already existing under the relevant loan contracts. Therefore, the Court finds it unnecessary to discuss the Kitson Parties’ other bases for summary adjudication of the conversion cause of action. Summary adjudication is granted on the conversion cause of action.

BHK’s Unjust Enrichment Causes of Action

In support of BHK’s unjust enrichment causes of action against Ross and Lee, BHK alleges that Ross and Lee unjustly benefitted from the payment of taxes for which they were personally liable. (BHK XC, ¶ 74; BHK 3PC, ¶ 70.)

The Kitson Parties contend that the unjust enrichment cause of action is without merit because there exists an express, enforceable contract covering the subject of the use of BHK’s loan funds. ((Durell v. Sharp Healthcare (2010) 183 Cal.App.4th 1350, 1370 [“As a matter of law, an unjust enrichment claim does not lie where the parties have an enforceable express contract.”].) BHK counters that the unjust enrichment claim is not based on Ross or Lee’s conduct under their respective contracts with BHK but rather on Ross and Lee’s allegedly fraudulent conduct, namely that Ross and Lee concealed material information from BHK prior to BHK entering into the loan transaction.

“The elements of an unjust enrichment claim are the receipt of a benefit and [the] unjust retention of the benefit at the expense of another.” ((Peterson v. Cellco Partnership (2008) 164 Cal.App.4th 1583, 1593 [internal quotations omitted; brackets in original].) The Kitson Parties next argue that the unjust enrichment claim fails because Ross and Lee did not receive a benefit or unjustly retain a benefit because the tax liabilities paid by BHK’s funds were Kitson’s liabilities. Here, it is undisputed that one of the purposes of BHK lending money to Kitson was to allow Kitson to pay its taxes. (UMF 18-19.) BHK contends that unjust enrichment may be claimed if the benefit conferred also “saves the other from expense or loss.” ((Ghirardo v. Antonioli (1996) 14 Cal.4th 39, 51.) BHK argues that Lee and Ross were saved from an expense in the form of having to pay Kitson’s tax bill out of their own pockets. But “[t]he mere fact that a person benefits another is not of itself sufficient to require the other to make restitution therefor.” (Peterson v. Cellco Partnership, supra, 164 Cal.App.4th at p. 1593 (internal quotation omitted).) “There is no equitable reason for invoking restitution when the plaintiff gets the exchange which he expected.” (Ibid.) Here, the evidence shows that payment of Kitson’s tax liabilities was within BHK’s expectations for how its loan funds were to be used. Therefore, the fact that Ross and/or Lee may have concealed information from BHK does not render the payment of those tax liabilities an unjust benefit to Ross and/or Lee. Summary adjudication is granted on the unjust enrichment causes of action.

Conclusion

Based on the foregoing, the Court grants the Kitson Parties’ motion for summary adjudication as to BHK and Spencer’s second cause of action for conversion asserted in BHK and Spencer’s Cross-Complaint and BHK and Spencer’s fourth cause of action for unjust enrichment asserted in BHK and Spencer’s Cross-Complaint and BHK and Spencer’s third cause of action for unjust enrichment asserted in BHK and Spencer’s Third Party Complaint. The Court denies the Kitson Parties’ motion for summary adjudication as to BHK and Spencer’s first cause of action for breach of contract asserted in BHK and Spencer’s Cross-Complaint, BHK and Spencer’s first cause of action for breach of shareholders agreement asserted in BHK and Spencer’s Third Party Complaint, and Salus and HGI’s first cause of action for breach of contract asserted in Salus and HGI’s Cross-Complaint. The Court denies the Kitson Parties’ motion for summary adjudication as to BHK and Spencer’s third cause of action for fraud asserted in BHK and Spencer’s Cross-Complaint and BHK and Spencer’s second cause of action for fraud asserted in BHK and Spencer’s Third Party Complaint.

The Court orders the Kitson Parties to give notice of this ruling.

DATED: January 28, 2020 _______________________________

Hon. Teresa A. Beaudet

Judge, Los Angeles Superior Court

Case Number: BC630062    Hearing Date: January 08, 2020    Dept: 50

Superior Court of California

County of Los Angeles

Department 50

Background

Plaintiffs and Cross-Defendants Fraser Ross (“Ross”), A-List, Inc. (“A-List”), and H-List, Inc. (“H-List”) (A-List and H-List to be jointly referred to as “Kitson” and Ross and Kitson to be collectively referred to as “Plaintiffs”) move pursuant to Code of Civil Procedure section 128, subdivision (a)(3) for an order staying all proceedings and for an order entering final judgment dismissing all claims as to Defendant Spencer Spirit Holdings Inc. (“Spencer”) so that Plaintiffs may proceed with an appeal of the Court’s August 29, 2019 order granting summary judgment in Spencer’s favor.

Plaintiffs’ Third Amended Complaint (“TAC”) was filed on August 31, 2018 against Spencer, BHK Investments, LLC (“BHK”), Salus Capital Partners, LLC (“Salus”), and HGI Asset Management Holdings, LLC (“HGI”) (collectively, the “Lender Defendants”). On October 16, 2018, Salus and HGI filed a cross-complaint against Kitson and Christopher Lee (“Lee”). On October 23, 2018, Spencer and BHK filed a cross-complaint against Kitson and Ross for, among other things, breach of contract, conversion, and fraud.

The Lender Defendants subsequently moved for summary judgment or, in the alternative, summary adjudication of the TAC. On August 29, 2019, the Court granted the motion for summary judgment as to Spencer and granted the motion for summary adjudication on the third, fourth, and fifth causes of action as to the Lender Defendants. As a result of that order, the only claims remaining to be tried (at the time this motion was filed) were Ross’s cause of action for violation of Business and Professions Code section 17200 against the Lender Defendants (except for Spencer) and Ross’s cause of action for unjust enrichment/constructive trust against Salus and HGI. On December 26, 2019 (after the filing of this motion), Plaintiffs filed a request for dismissal of the TAC as to Salus and HGI. The dismissal was entered as requested on December 27, 2019.

Currently, Plaintiffs and Lee have a pending joint motion for summary adjudication of certain of the Lender Defendants’ cross-claims, which is set for hearing on January 28, 2020.

Discussion

“Every court shall have the power to do all of the following: . . . . (3) To provide for the orderly conduct of proceedings before it, or its officers.” ((Code Civ. Proc., § 128, subd. (a)(3).) The “case management tools available to trial courts” include “the inherent authority to stay an action when appropriate.” ((Jordache Enterprises, Inc. v. Brobeck, Phleger & Harrison (1998) 18 Cal.4th 739, 758.)

Pursuant to the one final judgment rule, the Court declined to enter judgment in favor of Spencer following the August 29, 2019 order granting Spencer’s motion for summary judgment because of Spencer’s pending cross-claims against Plaintiffs. ((Maier Brewing Co. v. Pacific Nat. Fire Ins. Co. (1961) 194 Cal.App.2d 494, 497 [“There can be but one final judgment in an action, and that is one which in effect ends the suit in the court in which it is entered, and finally determines the rights of the parties in relation to the matter in controversy.”].) Notwithstanding this rule and notwithstanding Plaintiffs’ assertion that the “presence of remaining cross-claims between the same parties typically prevents entry of a final judgment,” Plaintiffs now request that the Court enter judgment against Spencer based on the “unique circumstances” of this case so that Plaintiffs may proceed with an appeal of the August 29, 2019 order. (Mot., p. 4:24-25.) Spencer and BHK oppose the motion.

Plaintiffs argue that the Court’s August 29, 2019 summary judgment order was based on a finding that Ross lacked standing to pursue the claims asserted by Kitson against the Lender Defendants, and that this finding “effectively forecloses” Spencer’s ability to litigate its own claims against Kitson. (Mot., p. 4:27-28.) As a threshold matter, the Court notes that in connection with the Court’s summary judgment order, the Lender Defendants merely demonstrated that the pertinent causes of action had no merit because an element of the causes of action (i.e., standing) was missing, and therefore, the Court found that summary adjudication of those causes of action was appropriate. The Court made no order regarding whether Ross’s lack of standing “effectively forecloses” any defendant’s ability to prosecute cross-claims against any plaintiff. Plaintiffs contend that Spencer, in essence, now has no cross-claim against Kitson that may to be litigated, but Plaintiffs fail to cite to any order making this so. Further, there is no evidence that Spencer’s cross-claim is the mirror image of Plaintiffs’ claims against Spencer such that disposing of one actually disposes of the other. ((See Swain v. California Casualty Ins. Co. (2002) 99 Cal.App.4th 1, 5-6 [in insurance coverage denial action, finding that trial court’s order granting defendant insurer’s motion for summary judgment “effectively disposed of” defendant insurer’s cross-claims for declaratory relief as to coverage obligations].)

Plaintiffs separately argue that judgment may be entered against Spencer because Plaintiffs’ claims against Spencer are entirely distinct and separable from Spencer’s claims against Kitson. However, this only lends further support to the conclusion that the rights of the parties have not been conclusively established. ((Ram v. OneWest Bank, FSB (2015) 234 Cal.App.4th 1, 9 [noting that the one final judgment rule does not apply “when the case involves multiple parties and a judgment is entered which leaves no issue to be determined as to one party”]); (Horton v. Jones (1972) 26 Cal.App.3d 952, 958 [“A trial court has no authority to enter multiple final judgments determining multiple issues between the same parties to an action.”].)

Alternatively, as set forth in Plaintiffs’ reply, and in light of the dismissal of Plaintiffs’ claims against Salus and HGI, Plaintiffs request that judgment be entered against Salus and HGI because there are no further claims or issues to be decided between Plaintiffs and Salus/HGI except a single cross-claim of Salus/HGI against Kitson. Plaintiffs contend that this “single” cross-claim (a breach of contract cause of action against Kitson) depends on whether Ross has standing to pursue Kitson’s affirmative claims. But it is unclear why this must be so. First, no final judgment has been entered regarding the standing issue. Until there is such judgment entered and it becomes final, there is no preclusive effect. Second, as Spencer and BHK argue with respect to Spencer’s cross-claim, there is a difference between lack of standing to sue and lack of capacity to be sued. Plaintiffs offer no binding authority for the proposition that if Kitson lacks standing to sue the Lender Defendants, Kitson necessarily lacks the ability to be sued by the Lender Defendants. Thus, the Court finds that the one final judgment rule prevents entry of judgment in Spencer’s favor or in Salus and HGI’s favor because there are pending claims involving the same parties. Because entry of judgment is inappropriate, the Court finds that there is no basis to issue a stay of proceedings.

Conclusion

Based on the foregoing, the Court denies Plaintiff’s motion for a stay.

The Court orders Spencer to give notice of this ruling.

DATED: January 8, 2020 _______________________________

Hon. Teresa A. Beaudet

Judge, Los Angeles Superior Court

Case Number: BC630062    Hearing Date: November 07, 2019    Dept: 50

SATISFACTORY PROOF OF PAYMENT OF PRO HAC VICE FEES WAS FILED.  NO APPEARANCE NECESSARY RE THE PRO HAC VICE ISSUE.  THE STATUS CONFERENCE WILL BE HELD.