ICD INNOVATIVE CONSTRUSTION & DESIGN, INC. v. XZ DEVELOPMENTS, INC., ET AL.

Standard

The function of a demurrer is to test the legal sufficiency of the challenged pleading. (Hernandez v. City of Pomona (1996) 49 Cal.App.4th 1492, 1497.) As a general rule, in testing a pleading against a demurrer, the facts alleged in the pleading are deemed to be true, however improbable they may be. (Del E. Webb Corp. v. Structural Materials Co. (1981) 123 Cal.App.3d 593, 604.) The court gives the pleading a reasonable interpretation by reading it as a whole and all of its parts in their context. (Moore v. Regents of Univ. of Calif. (1990) 51 Cal.3d 120, 125.)

In a demurrer proceeding, the defects must be apparent on the face of the pleading or via proper judicial notice. (Donabedian v. Mercury Ins. Co. (2004) 116 Cal.App.4th 968, 994.) The face of the complaint includes matters shown in exhibits attached to the complaint and incorporated by reference. (Frantz v. Blackwell (1987) 189 Cal.App.3d 91, 94.) “The only issue involved in a demurrer hearing is whether the complaint, as it stands, unconnected with extraneous matters, states a cause of action.” (Hahn v. Mirda (2007) 147 Cal.App.4th 740, 747.)

Merits

First Cause of Action – Equitable and Implied Contractual Indemnity

This cause of action combines two theories of indemnity: implied contractual indemnity and equitable indemnity. Defendants demur on the ground that neither theory is adequately pleaded because the XZ Contract contains no express indemnity provision and because the alleged change orders are inadequately pleaded. Because a demurrer does not lie as to a part of a cause of action, the claim survives if either theory is sufficiently pleaded. (PHI II, Inc. v. Sup. Ct. (1995) 33 Cal.App.4th 1680, 1682.)

Generally, “indemnity refers to ‘the obligation resting on one party to make good a loss or damage another party has incurred.’ ” (Prince v. Pacific Gas & Electric Co. (2009) 45 Cal.4th 1151, 1157, quoting Rossmoor Sanitation, Inc. v. Pylon, Inc. (1975) 13 Cal.3d 622, 628.) There are two basic types of indemnity: express indemnity, which relies on an express contract term providing for indemnification, and equitable indemnity, which embraces “traditional equitable indemnity” and implied contractual indemnity. (Id. at pp. 1157–1159.)

Equitable indemnity is “rooted in principles of equity” and “requires no contractual relationship between an indemnitor and an indemnitee.” (Jocer Enterprises, Inc. v. Price (2010) 183 Cal.App.4th 559, 573, citations omitted.) However, to recover for equitable indemnity, the defendant must owe a duty to the injured third party. (Ibid.) The defendant cannot be immune from liability or found not to be responsible for the injury. (Id. at 573-574.) Implied contractual indemnity presupposes a contractual relationship that supports a right to indemnification not rooted in an express contract term. (Prince, supra, 45 Cal.4th at p. 1159.)

Here, the Complaint adequately alleges the elements of equitable indemnity. Mr. Fenster made claims against and sued Plaintiff for Defendants’ acts, conduct, and omissions. (Comp., ¶ 25.) This establishes that both Plaintiff and Defendants face potential liability to the same injured party arising from the same incident. Mr. Fenster alleges in his Petition that he has suffered substantial damages by having to contract with third parties to haul off the grading and dirt from the Subject Property. (Id., ¶ 20.) Pursuant to the Proposal and Fenster Contract, the Project included the hauling off excavation dirt from the Subject Property. (Id., ¶ 14.) Plaintiff alleges it is exposed to liability to Mr. Fenster for damages arising from the failure to remove dirt from the property, and that Defendants' conduct is the source of that liability.

Most directly, Plaintiff alleges it is informed and believes, and thereon alleges, that Defendants solely and proximately caused Mr. Fenster’s harm. (Id., ¶ 21.) This allegation, combined with the factual allegations that Defendants were responsible for the excavation and hauling off of dirt, that Defendants failed to remove the grading and dirt from the Subject Property Id. ¶ 18, and that Mr. Fenster alleges he has suffered substantial damages by having to contract with third

parties to haul off the grading and dirt Id. ¶ 20, adequately pleads both causation and fault. (Id., ¶¶ 17, 18, 20.) The Complaint alleges Defendants undertook responsibility for dirt removal work, failed to perform that work, and that failure proximately caused the damages Mr. Fenster now asserts against Plaintiff. These allegations must be accepted as true at this stage.

As to implied contractual indemnity theory, the Court agrees the theory is not adequately pleaded in its current form. Plaintiff fails to identify any contractual language obligating Defendants to indemnify Plaintiff for the alleged damages since there is no such a provision in the Contract at issue, which was attached as Exhibit C to Plaintiff's Complaint. The Complaint does not identify an express indemnity provision, and the alleged change orders are described only in conclusory, information-and-belief terms without facts showing when they were made, in what form, by whom they were authorized, or how they satisfy the requirements for contractual modification. That deficiency, however, affects only one of the two theories pleaded in this cause of action. Here, the equitable indemnity theory is adequately pleaded; the implied contractual indemnity theory is not.

Because at least one theory supporting the First Cause of Action is viable, the demurrer to the First Cause of Action must be overruled in its entirety.

Second Cause of Action – Declaratory Relief

Code of Civil Procedure section 1060 authorizes declaratory relief in cases of actual controversy relating to the legal rights and duties of the parties. A declaratory relief claim is generally sufficient if it alleges an actual controversy and seeks a declaration of the parties' rights.

Here, an actual controversy has now arisen between Plaintiff and Defendants in which Plaintiff seeks a declaration from the Court as to its right to be indemnified and to be held harmless by each Defendant. (Comp., ¶ 34.) This claim is derivative of the indemnity theories alleged in the First Cause of Action. Because at least one underlying indemnity theory is adequately pleaded and survives demurrer, an actual controversy is properly alleged and the declaratory relief claim is viable. The claim seeks a present adjudication of the parties’ as respective indemnity obligations in connection with the pending Fenster arbitration. Such declaratory relief is appropriate when an actual controversy exists.

The demurrer to the Second Cause of Action is overruled.

Alter Ego Allegations as to Zhang

To invoke the alter ego doctrine, the plaintiff must plead (1) unity of interest and ownership and (2) that an inequity will result if the corporate entity is treated as the sole actor. (See Vasey v. California Dance Co. (1977) 70 Cal.App.3d 742, 749.) Courts liberally apply the alter

ego doctrine when the equities and justice of the situation call for it rather than restricting it to technical requirements of pleading and procedure. (First Western Bank & Trust Co. v. Bookasta (1968) 267 Cal.App.2d 910, 915.) The complaint only need “set forth the ultimate facts constituting the cause of action, not the evidence by which plaintiff proposes to prove those facts.” (Committee on Children’s Television, Inc. v. General Foods Corp. (1983) 35 Cal.3d 197, 212.) The standard requiring only the pleading of ultimate facts, rather than evidentiary facts, is consistent with the principle that less particularity of pleading is required where the defendant may be assumed to possess knowledge of the facts at least equal, if not superior, to that possessed by plaintiff. (Rutherford Holdings, LLC v.

Plaza Del Rey (2014) 223 Cal.App.4th 221, 236; Doe v. City of Los Angeles (2007) 42 Cal.4th 531, 550.)

While the pleading standard for alter ego liability is liberal, Defendants are correct that the allegations here are insufficient. A complaint “must set forth the facts with sufficient precision to put the defendant on notice about what the plaintiff is complaining and what remedies are being sought.” (Leek v. Cooper (2011) 194 Cal.App.4th 399, 415.) Therefore, to “recover on an alter ego theory, a plaintiff... must allege sufficient facts to show a unity of interest and ownership, and an unjust result if the corporation is treated as the sole actor.” (A.J. Fistes Corp. v. GDL Best Contractors, Inc. (2019) 38 Cal.App.5th 677, 696.) Plaintiff has not pled any of the underlying facts supporting the conclusory assertions above. (Comp., ¶ 7.)

Plaintiff may be able to amend to allege specific instances of commingling, diversion of corporate funds, disregard of records or meetings, undercapitalization, non-arm’s-length transfers, or facts showing that adherence to XZ’s separate existence would produce a casespecific inequitable result. The demurrer to the claims against Zhang based on alter ego allegations is sustained with leave to amend.

All parties must comply with Marin County Superior Court Local Rules, Rule 2.10(B) to contest the tentative decision. Parties who request oral argument are required to appear in person or remotely by ZOOM. Regardless of whether a party requests oral argument in accordance with Rule 2.10(B), the prevailing party shall prepare an order consistent with the announced ruling as required by Marin County Superior Court Local Rules, Rule 2.11.

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