Stacy Bromley, et al. v. Steven McGowan, et al.

Stacy Bromley, et al. v. Steven McGowan, et al., 25CV-0127

Hearing: Demurrer to Second Amended Complaint

Date: September 3, 2026

In February 2025, Stacy Bromley and Margaret O’Hara (as the trustee of The Kirby K. Gordon Family Trust Dated April 6, 2017) filed this action against Steven McGowan, Anthony Toste, Silver Shoals Investors, LLC, SSD, Inc., and Toste Construction, Inc. Plaintiffs filed a second amended complaint in March 2026 (the SAC). In the interim, McGowan, Silver Shoals, and SSD filed a cross-complaint against Plaintiffs in December 2025. The dispute concerns property development in Shell Beach (the Project).

Currently on calendar is McGowan’s demurrer to the fourth cause of action (fraudulent concealment) on the ground the SAC fails to plead facts sufficient to state a claim. (Code Civ. Proc., § 430.10(e).) The Court overrules the demurrer.

A.

Legal Standard

A demurrer challenges only the defects that appear on the face of the pleading under attack, or from matters outside the pleading which are subject to judicial notice. (Code Civ. Proc., § 430.30(a).) When reviewing a demurrer, a court must draw all reasonable inferences in favor of the plaintiff. (Perez v. Golden Empire Transit Dist. (2012) 209 Cal.App.4th 1228, 1239.) “The facts alleged in the pleading are deemed to be true, however improbable they may be.” (Berg & Berg Enterprises, LLC v. Boyle (2009) 178 Cal.App.4th 1020, 1034.) “To survive a demurrer, the complaint need only allege facts sufficient to state a cause of action; each evidentiary fact that might eventually form part of the plaintiff’s proof need not be alleged.” (C.A. v. William S. Hart Union High School Dist. (2012) 53 Cal.4th 861, 872.)

B.

Discussion

McGowan argues the fourth cause of action for fraudulent concealment is barred by the economic loss rule. That rule provides generally that “ ‘there is no recovery in tort for negligently inflicted “purely economic losses,” meaning financial harm unaccompanied by physical or property damage.’ [Citation.]” (Rattagan v. Uber Technologies, Inc. (2024) 17 Cal.5th 1, 20 (Rattagan).) Stated another way, “ ‘[t]he economic loss rule requires a [contractual party] to recover in contract for purely economic loss due to disappointed expectations, unless [the party] can demonstrate harm above and beyond a broken contractual promise.’ ” (Ibid., quoting Robinson Helicopter v. Dana Corp. (2004) 34 Cal.4th 979, 988.)

“The economic loss rule does not act as an absolute bar to tort recovery in every case in which the parties have a contractual relationship. Courts generally permit tort suits if the defendant allegedly violated a duty rooted in tort principles that is independent of the parties’ contractual rights and obligations and exposed the plaintiff to a risk of harm beyond the parties’ reasonable contemplation when they entered into the contract.” (Rattagan, supra, 17 Cal.5th at p. 23, see also p. 38 [plaintiff may “assert an independent claim of fraudulent concealment in the performance of a contract”].)

Plaintiffs respond the SAC alleges intentional concealment, not negligent performance of a contract. Plaintiffs provide the following examples: “McGowan deceived his fellow investors by misrepresenting the accounting, secretly charging the Project approximately $2.7 million in unauthorized ‘interest,’ gifting himself a free oceanfront lot through the concealed accounting, and stealing from the project to give himself and his childhood friend and co-conspirator Anthony Toste free condo upgrades ....” (Opp., 6:20-25; SAC, ¶¶ 15-18, 48-57.) The SAC alleges Defendants actively concealed records from Plaintiffs. This is sufficient to allege a duty rooted in tort principles independent of the parties’ contractual rights.

As for whether the SAC alleges a risk of harm beyond the parties’ reasonable contemplation when they entered into the contract, the SAC alleges Plaintiffs are at risk of third-party litigation. Specifically, because Plaintiff O’Hara is unable to settle the estate of Kirby Gordon (an original investor) to the detriment of the beneficiaries and because Plaintiff Bromley is bound to pay 2.5% of the net profits to Gordon (i.e., his estate) and has been unable to comply due to Defendants’ alleged fraudulent acts. (SAC, ¶ 59.) Plaintiffs argue the “risk of third-party litigation, interest payments, and fiduciary-administration harm is not merely a request for unpaid profits; it is a separate consequence of Defendants’ deceit.” (Opp., p. 7, ll. 9-11.) This is sufficient to plead a risk of harm beyond the parties’ reasonable contemplation when they entered into the contract.

McGowan acknowledges that “in determining whether alleged conduct and damages fell outside the parties’ contractual obligations the [Rattagan] court examined whether the plaintiff was exposed to a risk of personal injury or property damages.” (Reply, p. 4, ll. 12-15.) Such risk exposure is not limited to personal injury or property damages but includes “harm beyond what the parties’ reasonable contemplation when they entered into the contract.” (Rattagan, supra, 17 Cal.5th at p. 23.) As stated, the SAC includes sufficient allegations for purposes of pleading around the economic loss rule.

In the reply, McGowan argues for the first time that the SAC fails to allege actual harm, and that the risk of third-party litigation is hypothetical. In support, McGowan sets forth the elements to state a cause of action for fraudulent concealment and argues the SAC does not allege Plaintiffs sustained any damages as a result of the concealment. This is a different argument than that made in McGowan’s opening brief.

Although McGowan’s opening brief included general statements that “Plaintiffs have not alleged any harm beyond lost profits,” or “stated any facts showing they were harmed beyond the reasonable contemplation of the alleged contract” (Dem., p. 5, ll. 20-21, 27), such statements were

made within the context of the discussion as to whether the SAC sufficiently pleads around the defense of the economic loss rule, not whether the SAC includes sufficient allegations to satisfy the damages element to state a claim for fraudulent concealment. Although both arguments fall under Code of Civil Procedure section 430.10(e) [failure to state facts sufficient to constitute a cause of action], they are distinct arguments. Generally, principles of fairness preclude new arguments being raised for the first time in the reply. (St. Mary v. Superior Court (2014) 223 Cal.App.4th 762, 783.)

The demurrer to the fourth cause of action is overruled.

ORDER (PROPOSED)

McGowan’s demurrer to the fourth cause of action is overruled. McGowan is to file an answer within ten (10) days from service of the notice of ruling. (Code Civ. Proc., § 472b; Cal. Rules of Court, rule 3.1320(g).) Plaintiffs are to serve the notice of ruling. (Code Civ. Proc., § 1019.5.)

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