Court Opinion

ID: 9894987
Source: CourtListenerOpinion
Date Created: 2023-11-03 20:03:13.175886+00
Date Added: 2024-06-11T09:10:54.940328
License: Public Domain

Filed 11/03/23 Upside Health v. Cabeau CA2/3

  NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS

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IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

                        SECOND APPELLATE DISTRICT

                                     DIVISION THREE

 UPSIDE HEALTH, INC.,                                             B323155

         Plaintiff and Appellant,                                 Los Angeles County
                                                                  Super. Ct. No.
          v.                                                      20VECV01399
 CABEAU, INC., et al.,

         Defendants and Respondents.

      APPEAL from a judgment of the Superior Court of Los
Angeles County, Shirley K. Watkins, Judge. Affirmed in part and
reversed in part with directions.
      Law Offices of Michael C. Murphy, Michael C. Murphy and
Michael C. Murphy, Jr., for Plaintiff and Appellant.
      Salomons Law Group and Gary K. Salomons for Defendant
and Respondent David Sternlight.
            _______________________________________
                          INTRODUCTION

      Upside Health, Inc. (Upside) sued Cabeau, Inc. (Cabeau)
and David Sternlight, Cabeau’s chief executive officer, for various
breach of contract and tort claims after Cabeau failed to pay for
several hundred thousand health masks that Upside sold to
Cabeau. Upside appeals from the judgment dismissing its claims
against Sternlight after the trial court sustained without leave to
amend Sternlight’s demurrer to Upside’s fourth amended
complaint.1 Upside argues the court erred in sustaining the
demurrer because Upside alleged sufficient facts to support its
causes of action for conversion, promissory fraud, and aiding and
abetting against Sternlight. Upside also seeks leave to add a new
cause of action for fraudulent concealment against Cabeau and
Sternlight.
      Although the pleading did not allege sufficient facts to state
a claim for conversion, it adequately pled claims for promissory
fraud and aiding and abetting against Sternlight. We thus affirm
in part, reverse in part, and remand for further proceedings. We
deny Upside’s request to add a cause of action for fraudulent
concealment.

       FACTUAL AND PROCEDURAL BACKGROUND

1.    The Purchase Agreement
      Upside is a health mask supplier. In June 2020, an Upside
representative contacted Will Fan, a Cabeau employee, to inquire
whether Cabeau was interested in purchasing masks from

1 The court overruled in part a separate demurrer filed by Cabeau, who

is not a party to this appeal.

                                  2
Upside. The next month, an Upside representative quoted Fan a
price for the masks and stated that Upside would agree to accept
payment from Cabeau within 30 days of when the masks were
shipped. Fan told the representative that he needed to speak to
Sternlight before Cabeau could agree to purchase any masks
from Upside.
       On July 13, 2020, Fan told Upside that Cabeau “decided to
onboard with [Upside] as Cabeau’s supplier” and would submit a
purchase order for masks. Fan confirmed that Cabeau had the
ability to pay for Upside’s masks. According to Upside, Sternlight
“instructed” Fan to assure Upside that Cabeau could meet
Upside’s terms of payment.
       On July 30, 2020, Fan and another Cabeau employee sent
Upside a purchase order for 700,000 health masks at a cost of 23
cents per mask. Upside and Cabeau agreed that Upside would
“invoice Cabeau for the goods, the goods would be shipped to
Cabeau’s customer (the State of Colorado), and Cabeau would pay
[Upside] for the product shipped within 30 days.”
       In August 2020, Upside shipped 700,000 masks to the State
of Colorado in two shipments, one containing 500,000 masks and
the other containing 200,000 masks. On August 3, Upside sent
Cabeau a $115,000 invoice for the first shipment of masks. On
August 18, 2020, the State of Colorado paid Cabeau $175,000 for
the first shipment.
       On August 21, 2020, Upside sent Cabeau a $46,000 invoice
for the second shipment of masks. On August 25, 2020, the State
of Colorado paid Cabeau $70,000 for the second shipment.
       Under the terms of its agreement with Upside, Cabeau was
required to pay the first invoice by September 2, 2020, and the

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second invoice by September 20, 2020. Cabeau did not pay either
invoice.
      On September 22, 2020, Sternlight told Upside that
Cabeau was “waiting for the money to come in.” Three days later,
Sternlight claimed Cabeau was still waiting to be paid by the
State of Colorado.
      Throughout October and November 2020, Sternlight
claimed Cabeau “was trying to collect from its other customers”
and that the company was also “speaking with a number of
investment groups to raise money to pay [Upside].”
      In December 2020, Sternlight informed Upside that
Cabeau’s finances were “in dire straits” and three “secured
creditors” had priority liens on Cabeau’s assets. Cabeau had
spent the previous nine months trying to “secure fresh capital,” so
it used “the large majority” of the money it received from the
State of Colorado to satisfy its payroll. Sternlight acknowledged
he made the decision not to pay Upside with the money Cabeau
received from the State of Colorado, and he warned Upside that
Cabeau would be forced to declare bankruptcy if Upside sued to
recover money owed on its invoices.
2.    Upside’s Lawsuit
        In November 2020, Upside sued Cabeau for breach of
contract (Count 1), goods and services rendered (Count 2), and
open book account (Count 3). Upside filed the operative fourth
amended complaint in April 2022, which named Cabeau and
Sternlight as defendants and, in addition to Counts 1 through 3
(all of which named only Cabeau as defendant), asserted claims
for conversion against Cabeau and Sternlight (Count 4), aiding
and abetting against Sternlight (Count 5), and promissory fraud
against Cabeau and Sternlight (Count 6).

                                4
       Counts 4 through 6 arose out of allegations that Cabeau
and Sternlight made false statements concerning Cabeau’s
financial status to induce Upside into selling Cabeau health
masks. Specifically, Upside alleged Cabeau and Sternlight were
aware that Cabeau “had no ability to pay” for Upside’s masks at
the time Cabeau and Sternlight assured Upside that Cabeau
could pay for the masks. According to Upside, “neither Cabeau
nor Sternlight had any intentions of performing their promises
[to pay] at the time they made them.” Rather, Cabeau’s and
Sternlight’s “intentions all along were to induce [Upside] to
transfer possession of its health masks and deliver them to
Cabeau’s customer while keeping all of the sales proceeds … for
themselves.” Upside alleged Cabeau’s failure to pay for the masks
caused Upside to go out of business.
       Sternlight demurred to Counts 4 through 6, and Cabeau
demurred to Counts 4 and 6, of the fourth amended complaint.
       The court sustained Sternlight’s demurrer in its entirety
without leave to amend. With respect to Count 4 (conversion), the
court found Upside failed to allege Sternlight took any
affirmative action, or made any false statements, that caused
Upside to ship its health masks to the State of Colorado. Upside
also failed to allege that Sternlight interfered with Upside’s
ability to recover the masks from the State of Colorado. As for
Count 6, the court found Upside failed to state a claim for
promissory fraud against Sternlight because the company never
alleged it communicated with him before agreeing to sell its
masks to Cabeau. As for Count 5, the court found Sternlight
could not be held liable for aiding and abetting Cabeau in
committing an intentional tort because Sternlight was acting in

                               5
his official capacity as Cabeau’s “CEO” when he engaged in all
the conduct giving rise to Upside’s claims.
       The court sustained Cabeau’s demurrer to Count 4 without
leave to amend and overruled the demurrer as to Count 6. As for
Count 4 (conversion), the court explained that Upside did not
allege Cabeau ever took possession of Upside’s masks, assumed
control over the masks, or otherwise applied the masks to its own
use. The court found Upside stated a claim for fraud against
Cabeau (Count 6), however, because it alleged: (1) Cabeau
knowingly made a false statement that it could pay for Upside’s
masks before Upside agreed to sell its masks to Cabeau and ship
them to the State of Colorado; (2) Cabeau never intended to pay
for Upside’s masks when it made the false statement; (3) Upside
would not have agreed to sell its masks to Cabeau had it known
Cabeau lacked the ability to pay for them; and (4) Cabeau’s false
representations caused Upside significant financial damage,
including causing the company to go out of business.
       On September 1, 2022, the court entered judgment in favor
of Sternlight and dismissed all of Upside’s claims against him.
Upside appeals from that judgment.

                          DISCUSSION

1.    Standard of Review
       We independently review an order sustaining a demurrer
to determine whether the operative complaint alleges facts
sufficient to state a cause of action. (Ivanoff v. Bank of America,
N.A. (2017) 9 Cal.App.5th 719, 725.) We assume the truth of all
properly pled factual allegations and matters that are judicially
noticeable, liberally construing the complaint’s allegations with a

                                 6
view toward substantial justice. (Ibid.; Quelimane Co. v. Stewart
Title Guaranty Co. (1998) 19 Cal.4th 26, 43, fn. 7.)
2.    Promissory Fraud (Count 6)
       In Count 6 of the fourth amended complaint, Upside
asserted a cause of action for promissory fraud against
Sternlight.
       To prevail on a claim for promissory fraud, the plaintiff
must prove: (1) before the parties entered the underlying
transaction, the defendant made a promise regarding a material
fact; (2) at the time the defendant made the promise, he did not
intend to perform on it; (3) the defendant intended to deceive or
induce the plaintiff to enter into the transaction; (4) the plaintiff
reasonably relied on the defendant’s promise to enter the
transaction; (5) the defendant did not perform on the promise;
and (6) the defendant’s conduct damaged the plaintiff. (Gruber v.
Gruber (2020) 48 Cal.App.5th 529, 540 (Gruber).)
       A plaintiff must plead every element of the alleged fraud
“in full, factually and specifically.” (Wilhelm v. Pray, Price,
Williams & Russell (1986) 186 Cal.App.3d 1324, 1331.) This
means the plaintiff must plead “facts which show how, when,
where, to whom, and by what means the [false] representations
were tendered.” (Robinson Helicopter Co., Inc. v. Dana Corp.
(2004) 34 Cal.4th 979, 993 (Robinson), internal quotes omitted.)
       Upside alleged the following facts in the fourth amended
complaint that, if true, would establish a claim for promissory
fraud against Sternlight. Before Upside agreed to sell its masks
to Cabeau, Sternlight instructed Fan, Cabeau’s employee who
negotiated the underlying purchase agreement, to assure Upside
that Cabeau had the ability to pay for the masks, even though
Sternlight was aware that Cabeau was insolvent. (See Hasso v.

                                  7
Hapke (2014) 227 Cal.App.4th 107, 130 [a defendant may be
liable for communicating a fraudulent promise through a third
party, if the defendant intends or has reason to expect that the
promise be communicated to the plaintiff].) Sternlight intended
to induce Upside into selling its masks to Cabeau when he made
the false assurance about Cabeau’s solvency, and Upside relied
on Sternlight’s false assurance when it agreed to sell its masks to
Cabeau. (See Gruber, supra, 48 Cal.App.5th at p. 540.) Sternlight
never intended for Cabeau to pay Upside for its masks, and he
later contributed to Cabeau’s decision not to pay Upside for its
masks. And finally, Sternlight’s conduct damaged Upside. (See
ibid.)
       That Sternlight may have been acting in his official
capacity as Cabeau’s chief executive officer when he engaged in
the allegedly fraudulent conduct does not insulate him from
liability. It is well settled that a defendant’s status as a corporate
director or officer does not immunize him from personal liability
for his own tortious conduct. (PMC, Inc. v. Kadisha (2000) 78
Cal.App.4th 1368, 1379.) If a corporate director or officer
“participate[s] in the wrong or authorize[s] or direct[s] that it be
done[,]” he may be held personally liable for that wrong. (United
States Liability Ins. Co. v. Haidinger-Hayes, Inc. (1970) 1 Cal.3d
586, 595.)
       We also reject Sternlight’s argument that Upside’s
promissory fraud claim is barred because it arises, in part, from
Cabeau’s breach of its agreement to purchase masks from Upside.
As our Supreme Court has explained, tort damages are permitted
in cases involving a breach of contract where “ ‘the contract was
fraudulently induced.’ ” (Robinson, supra, 34 Cal.4th at pp. 989–
990.) Thus, where, as here, “ ‘one party commits a fraud during

                                  8
the contract formation or performance, the injured party may
recover in contract and tort.’ ” (Id. at p. 990.)2
      Because Upside stated a claim for promissory fraud against
Sternlight, the court should have overruled Sternlight’s demurrer
to Count 6.
3.    Conversion (Count 4)
       In Count 4 of the fourth amended complaint, Upside
asserted a cause of action for conversion against Sternlight.
       To prevail on a claim for conversion, the plaintiff must
establish: (1) it owns, or has a right to possess, the property at
issue; (2) the defendant committed a wrongful act that interferes
with the plaintiff’s right to possess the property; and (3) the
defendant’s conduct damaged the plaintiff. (Archer v. Coinbase,
Inc. (2020) 53 Cal.App.5th 266, 276.) Conversion is any act of
dominion wrongfully asserted over the plaintiff’s property that is
inconsistent with the plaintiff’s rights to that property.
(Enterprise Leasing Corp. v. Shugart Corp. (1991) 231 Cal.App.3d
737, 747.) “ ‘It is not necessary that there be a manual taking of
the property; it is only necessary to show an assumption of

2 Sternlight’s related contention that the economic loss rule bars the

fraud claim lacks merit. (See Robinson, supra, 34 Cal.4th at p. 991
[economic loss rule does not bar plaintiff’s fraud and intentional
misrepresentation claims because they were independent of
defendant’s breach of contract].) We also disagree with Sternlight that
Upside could not reasonably rely on Fan’s statement, at Sternlight’s
direction, concerning Cabeau’s ability to pay. “Except 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.” (Blankenheim v. E. F. Hutton & Co. (1990) 217
Cal.App.3d 1463, 1475.) This is not one of those rare cases.

                                    9
control or ownership of the property, or that the alleged converter
has applied the property to his own use.’ ” (Ibid.)
       Upside claims Sternlight wrongfully dispossessed Upside of
its property—the health masks—through false promises that the
company could pay for those masks. (See Elliott v. Federated
Fruit and Vegetable Growers (1930) 108 Cal.App. 412, 417
[obtaining goods by fraud constitutes conversion].) As we explain,
Upside failed to state a claim for conversion against Sternlight.
       The parties do not dispute that Upside owned the masks
giving rise to its conversion claim before it shipped them to the
State of Colorado. Additionally, Upside alleged that Sternlight
committed a wrongful act that contributed to Upside’s decision to
relinquish possession of its masks—i.e., his false assurance that
Cabeau could pay for the masks. But Upside did not allege that
Sternlight assumed control or ownership over Upside’s masks or
used those masks for his own use. Rather, Upside alleged that,
based on Sternlight’s and Cabeau’s assurances, it decided to sell
its masks to Cabeau and that it shipped the masks directly to the
State of Colorado at Cabeau’s request. Thus, while Sternlight’s
conduct may have been a contributing factor to Upside’s decision
to relinquish possession of its masks, the fourth amended
complaint does not allege that Sternlight asserted any control
over the masks before or after Upside relinquished possession of
them.
       In its opening brief, Upside asserts Sternlight improperly
used the proceeds that the State of Colorado paid Cabeau for
Upside’s masks to pay Cabeau’s payroll. To the extent Upside
argues it stated a claim for conversion of the proceeds Cabeau
received from the State of Colorado, that argument lacks merit.

                                10
       Generally, money cannot be the “property” at issue in a
conversion claim, unless a “ ‘specific sum capable of identification
is involved.’ ” (Voris v. Lampert (2019) 7 Cal.5th 1141, 1151
(Voris).) Thus, “ ‘the simple failure to pay money owed does not
constitute conversion.’ ” (Ibid.) Likewise, “a mere contractual
right of payment, without more,” will not give rise to a conversion
claim. (Farmers Ins. Exchange v. Zerin (1997) 53 Cal.App.4th
445, 452.) Rather, the plaintiff must point to some contractual
provision that establishes the “plaintiff has a possessory right to
certain funds in the defendant’s hands.” (Voris, at p. 1152.)
       Upside alleged only that Cabeau agreed to pay for the
masks that Upside shipped to the State of Colorado. Upside did
not allege that Cabeau or Sternlight agreed to pay Upside with
the funds that the State of Colorado paid Cabeau for Upside’s
masks, nor does the purchase order that Upside attached to its
fourth amended complaint reflect such an agreement. And
Upside never alleged that its agreement to sell masks to Cabeau
established title to, or a lien upon, the proceeds Cabeau received
from the State of Colorado. At most, then, Upside alleged it had a
contractual right to payment for the masks that Cabeau
purchased. But a contractual right to payment is insufficient to
establish Upside owned, or had a right to possess, the specific
funds that Cabeau received from the State of Colorado for
Upside’s masks. (Voris, supra, 7 Cal.5th at pp. 1150–1152.)
Consequently, Upside cannot state a claim for conversion arising
out of Cabeau’s or Sternlight’s use of the proceeds that Cabeau
received from the State of Colorado.
4.    Aiding and Abetting (Count 5)
      In Count 5 of the fourth amended complaint, Upside
asserted a claim for aiding and abetting an intentional tort

                                11
against Sternlight. According to Upside, Sternlight aided and
abetted Cabeau in converting Upside’s masks and in committing
promissory fraud.
       In California, a defendant may be liable for aiding and
abetting the commission of an intentional tort if he: (1) has actual
knowledge of the “specific primary wrong” being committed by
another person or entity and gives substantial assistance or
encouragement to the other person or entity in committing the
wrongful act or (2) gives substantial assistance to the other
person or entity in accomplishing a tortious result and the
defendant’s own conduct, separately considered, constitutes a
breach of duty to the plaintiff. (Casey v. U.S. Bank Nat. Assn.
(2005) 127 Cal.App.4th 1138, 1144–1146.)
       Upside asserted a claim for promissory fraud against
Cabeau based on identical allegations giving rise to its
promissory fraud claim against Sternlight. The court overruled
Cabeau’s demurrer to Count 6, finding Upside alleged sufficient
facts to state a claim for promissory fraud against Cabeau. For
the same reasons provided above in our analysis of Upside’s
promissory fraud claim against Sternlight, we agree that Upside
stated a claim for promissory fraud against Cabeau. Thus, we
must determine whether Upside alleged sufficient facts to state a
claim against Sternlight for aiding and abetting Cabeau’s
promissory fraud. We conclude that it did.
       In Count 5, Upside alleged Sternlight was aware Cabeau
fraudulently induced Upside into agreeing to sell its masks to
Cabeau. Indeed, Upside alleged Sternlight was one of the key
decisionmakers in forming Cabeau’s fraudulent scheme. (See
Frances T. v. Village Green Owners Assn. (1986) 42 Cal.3d 490,
507 [a corporate officer or director may be held personally liable

                                12
for the torts of his company if he “ ‘participate[s] in the wrong or
authorize[s] or direct[s] that it be done’ ”].) Upside also alleged
that Sternlight gave substantial assistance to Cabeau in
committing that fraud by, among other things, (1) making false
assurances about Cabeau’s solvency to convince Upside to sell its
masks to Cabeau, and (2) deciding not to pay Upside for the
masks after Upside performed its obligations under the purchase
agreement.
      Because Upside stated a claim against Sternlight for aiding
and abetting Cabeau’s promissory fraud, the court should have
overruled Sternlight’s demurrer to Count 5.
5.    Leave to Add a Cause of Action for Fraudulent
      Concealment
       When a demurrer is sustained without leave to amend, we
must determine whether there is a reasonable possibility that the
plaintiff can amend its complaint to cure the defect. (Blank v.
Kirwan (1985) 39 Cal.3d 311, 318.) If the defect can be cured, “the
trial court has abused its discretion and we reverse; if not, there
has been no abuse of discretion and we affirm.” (Ibid.) “The
burden of proving such reasonable possibility is squarely on the
plaintiff.” (Ibid.) Such a showing can be made for the first time on
appeal. (Smith v. State Farm Mutual Automobile Ins. Co. (2001)
93 Cal.App.4th 700, 711.)
       As a preliminary matter, we note that Upside does not
address how it could amend its pleading to cure the defects in
Count 4, its claim for conversion against Sternlight. Upside has,
therefore, waived any argument that it should be granted leave
to amend Count 4 against Sternlight. (Badie v. Bank of America
(1998) 67 Cal.App.4th 779, 784–785 [“When an appellant fails to
raise a point, or asserts it but fails to support it with reasoned

                                13
argument and citations to authority, we treat the point as
waived.”].)
       Upside does, however, request leave to add a seventh cause
of action for fraudulent concealment against Cabeau and
Sternlight. Upside argues that because it stated a cause of action
for promissory fraud against Sternlight and Cabeau, it
necessarily can state a cause of action for fraudulent concealment
against them. Even assuming Upside’s request to add a new
cause of action is cognizable on appeal, including against a party
not involved in the appeal, it has not met its burden to support
its request.
       To establish a claim for fraudulent concealment, the
plaintiff must prove the defendant had a duty to disclose the
concealed facts to the plaintiff. (Hahn v. Mirda (2007) 147
Cal.App.4th 740, 745.) Upside makes no effort to explain what
specific facts Cabeau or Sternlight concealed for purposes of a
fraudulent concealment claim. Upside also does not explain how
it could allege Cabeau or Sternlight owed it a duty to disclose any
concealed facts. Because Upside has not explained how it can
plead a claim for fraudulent concealment against Sternlight or
Cabeau, we deny its request for leave to assert such a claim.

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                         DISPOSITION

      The judgment is affirmed in part and reversed in part. The
matter is remanded to the trial court with directions to vacate its
order sustaining Sternlight’s demurrer to the fourth amended
complaint without leave to amend. The court shall enter a new
order sustaining the demurrer without leave to amend as to
Count 4 and overruling the demurrer as to Counts 5 and 6. The
parties shall bear their own costs on appeal.

  NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS

                                                      LAVIN, J.
WE CONCUR:

      EDMON, P. J.

      EGERTON, J.

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