Temple Beth El of South Orange County v. The Discovery Preparatory School

B. Sham Pleading

DPSI first argues that the SAC constitutes a sham pleading and should be sustained in its entirety. The court disagrees.

Under the sham pleading doctrine, harmful admissions or allegations in a complaint cannot be omitted/altered in an amended pleading without explanation, and in the case of such amendments, the court may take judicial notice of the prior pleading and disregard any inconsistent allegations. (Deveny v. Entropin, Inc. (2006) 139 Cal.App.4th 408, 425.)

“The court may examine the prior complaint to ascertain whether the amended complaint is merely a sham. [Citation.] ... Moreover, any inconsistencies with prior pleadings must be explained; if the pleader fails to do so, the court may disregard the inconsistent allegations. [Citation.]” (Larson v. UHS of Rancho Springs, Inc. (2014) 230 Cal. App. 4th 336, 343–44).

Here, DPSI argues that in the prior first amended complaint, Plaintiff alleges: “Plaintiff does not have privity of contract with Discovery Inc. and has no means of collecting past due rent from Discovery Inc.” (FAC ¶ 77.) However, in the SAC, Plaintiff now alleges that the License Agreement was made between Plaintiff and DPSI.

DPSI, however, is ignoring the full context of the SAC. Plaintiff acknowledges that the signatory to the License Agreement was Discovery, LLC. However, Plaintiff makes multiple allegations that, although Discovery, LLC, signed the agreements at issue, DPSI should be vicariously liable on these agreements as a mere conduit, a single business enterprise, and/or a successor to Discovery, LLC. Plaintiff expressly alleges in the SAC that the agreement was signed by Discovery, LLC. The court finds that the SAC provides sufficient explanation as to why, even without privity of contract, Plaintiff contends that an implied contract existed between Plaintiff and DPSI. As such, the sham pleading doctrine does not apply here.

C. Vicarious Liability Allegations against DPSI

Here, Defendant DPSI’s main argument is that the licensing agreements at issue were between Plaintiff and Defendant The Discovery Preparatory School, Ltd. Liability Co. (“Discovery, LLC”). Yet despite the agreement being between Plaintiff and the Discovery, LLC, and no contract exists between Plaintiff and DPSI, Plaintiff has not sufficiently alleged alter ego and/or any other vicarious liability theory against DPSI.

Courts have expanded the alter ego theory to apply to other corporations under a mere conduit/single business enterprise theory. (Toho-Towa Co., Ltd. v. Morgan Creek Productions, Inc. (2013) 217 Cal.App.4th 1096, 1107–1108). “A court may also disregard the corporate form in order to hold one corporation liable for the debts of another affiliated corporation when the latter ‘is so organized and controlled, and its affairs are so conducted, as to make it merely an instrumentality, agency, conduit, or adjunct of another corporation.’” (Id.) “Under the ‘single business enterprise’ doctrine, separate corporations may operate with integrated resources in pursuit of a single business purpose.” (Id.) “The ‘singlebusiness-enterprise’ theory is an equitable doctrine applied to reflect partnership-type liability principles when corporations integrate their resources and operations to achieve a common business purpose.” (Id.)

Alter ego and/or the mere conduit/single business enterprise theory, therefore, seek to how the “equitable owner” responsible when the corporate form is sued to perpetuate a fraud, circumvent a statute, or accomplish some other wrongful or inequitable purpose. (Sonora Diamond Corp. v. Superior Court (2000) 83 Cal.App.4th 523, 538).

Further, under a separate theory, successor liability is an equitable doctrine that applies when a purchasing corporation is merely a continuation of the selling corporation, or the asset sale was fraudulently entered to escape debts and liabilities. (See Brown Bark III, L.P. v. Haver (2013) 219 Cal.App.4th 809, 822.) To invoke successor liability, the rule states that the purchaser does not assume the seller’s liabilities unless (1) there is an express or implied agreement of assumption; (2) the transaction amounts to a consolidation or merger of the two corporations; (3) the purchasing corporation is a mere continuation of the seller; or (4) the transfer of assets to the purchaser is for the fraudulent purpose of escaping liability for the seller’s debts. (Cleveland v. Johnson (2012) 209 Cal.App.4th 1315, 1327).

In terms of pleading, a party is required “to allege only ‘ultimate rather than evidentiary facts’” to allege alter ego. (Rutherford Holdings, LLC v. Plaza Del Rey (2014) 223 Cal.App.4th 221, 236). For example, the following allegations have been found to be sufficient to plead alter ego liability: “Rutherford alleged that Caswell dominated and controlled PDR; that a unity of interest and ownership existed between Caswell and PDR; that PDR was a mere shell and conduit for Caswell's affairs; that PDR was inadequately capitalized; that PDR failed to abide by the formalities of corporate existence; that Caswell used PDR assets as her own; and that recognizing the separate existence of PDR would promote injustice.” (Id. at 235-236).

Here, Plaintiff sufficiently alleges facts to give DPSI notice of the basis of plaintiff’s alter ego theory. Plaintiff’s allegations mirror that of the Rutherford allegations. Plaintiff has alleged the ultimate facts to allege that DPSI is either a mere conduit/single business enterprise as Discovery, LLC, and/or that DPSI is liable as a successor to Discovery, LLC. Each of the causes of action alleged against DPSI are sufficient to give DPSI notice of the basis under which Plaintiff seeks to hold DPSI, specifically, liable. At the pleading stage this is sufficient.

D. Second Cause of Action for Breach of Contract

“To state a cause of action for breach of contract, it is required that there be a pleading of the contract, plaintiffs’ performance (or excuse for nonperformance), defendant's breach, and damage to plaintiff therefrom.” (Gautier v. General Tel. Co. (1965) 234 Cal.App.2d 302, 305.)

Here, DPSI argues that Plaintiff cannot allege a breach of contract cause of action against DPSI because no contract exists between the parties. As explained above, however, Plaintiff has alleged that DPSI is vicariously liable for the contract Plaintiff entered into with Discovery, LLC under a mere conduit theory. (SAC, ¶¶ 103-107). These allegations are sufficient.

The demurrer is overruled as to the second cause of action.

E. Fourth Cause of Action for Breach of Implied-in-Fact Contract

“A cause of action for breach of implied contract has the same elements as does a cause of action for breach of contract, except that the promise

is not expressed in words but is implied from the promisor's conduct.” (Aton Center, Inc. v. United Healthcare Ins. Co. (2023) 93 Cal.App.5th 1214, 1230). “An implied contract must be founded upon an ascertained agreement of the parties to perform it.” (See Siskiyou Hosp., Inc. v. Cnty. of Siskiyou (2025) 109 Cal.App.5th 14, 52 review denied (May 28, 2025).)

DPSI argues that it did not make any promises to Plaintiff. Again, as set forth above, Plaintiff alleges that Discovery, LLC and DPSI are one and the same. Plaintiff alleges that despite Discovery, LLC, being the one named in the agreements, DPSI was making the payments to Plaintiff under the agreements and DPSI was the one who actually benefitted from the agreements in that its classes were being conducted at Plaintiff’s property. This is sufficient to allege an implied in fact contract. The demurrer is overruled as to the fourth cause of action.

F. Fifth Cause of Action for Quantum Meruit

“Quantum meruit refers to the well-established principle that the law implies a promise to pay for services performed under circumstances disclosing that they were not gratuitously rendered.” (Fair v. Bakhtiari (2011) 195 Cal.App.4th 1135, 1150.) “To recover in quantum meruit, a party nee not prove the existence of a contract, but it must show the circumstances were such that the services were rendered under some understanding or expectation of both parties that compensation therefor was to be made.” (Ibid.)

Again, Plaintiff alleges that despite Discovery, LLC, being the one named in the agreements, DPSI was making the payments to Plaintiff under the agreements and DPSI was the one who actually benefitted from the agreements in that its classes were being conducted at Plaintiff’s property. This is sufficient to allege a cause of action for quantum meruit against DPSI. The demurrer to overruled as to the fifth cause of action.

G. Seventh Cause of Action for Dishonored Checks

Civil Code section 1719 states, in relevant part, “Notwithstanding any penal sanctions that may apply, any person who passes a check on insufficient funds shall be liable to the payee for the amount of the check and a service charge payable to the payee...” (Civ. Code, § 1719, subd. (a)(1).)

DPSI argues that Plaintiff does not allege that DPSI delivered a check of insufficient funds to Plaintiff. Plaintiff, however, does allege that DPSI delivered a check in September 23, 2024 to Plaintiff. (SAC, ¶ 153). Whether or not that check actually came from DPSI, Davis, or Discovery, LLC is a question of fact that cannot be determined on demurrer. On its face, the allegations are sufficient to allege a cause of action for dishonored checks against DPSI. The demurrer to the seventh cause of action is overruled.

H. Ninth Cause of Action for Breach of Covenant of Good Faith and Fair Dealing

While the notice of the demurrer challenges the sufficiency of the ninth cause of action against DPSI, the memorandum does not provide the court with any legal authority or factual analysis as to why the ninth cause of action is purportedly insufficiently pled against DPSI. The demurrer to the ninth cause of action is, therefore, overruled.

Moving Defendant to give notice.

Case Management Conference

The Case Management Conference is continued to July 23, 2026, at 9:00 a.m. in this department.

Plaintiff to give notice.

7 Arroyo v. Plaintiff Hermila Arroyo’s motion to set aside order of dismissal is California Lawyers GRANTED on condition that Defendants are served within 30 days of this & Advocates, APC order.

The court sets an OSC re dismissal for failure to serve Defendants for June 25, 2026 at 9:00 a.m.

Plaintiff seeks to set aside the dismissal entered on April 10, 2025. Given that the dismissal occurred more than six months ago, Plaintiff seeks to set aside the dismissal based on the court’s equitable power and not section 473.

Apart from any statutory authority, a court has inherent, equitable power to set aside a judgment on the ground of “extrinsic fraud or mistake.” (Olivera v. Grace (1942) 19 Cal. 2d 570, 576). There are three essential requirements to obtain relief. The party in default must show: (1) a meritorious defense; (2) a satisfactory excuse for not presenting a defense to the original action; and (3) diligence in seeking to set aside the default once it was discovered. (Rappleyea v. Campbell (1994) 8 Cal. 4th 975, 982).

A motion to vacate a default or dismissal that is made more than six months after entry of default can be made on the ground that a court has the inherent equitable power to grant such relief where there has been extrinsic fraud or mistake. (Orange Empire Nat. Bank v. Kirk, (1968) 259 Cal.App.3d 347, 352-53).

“Extrinsic mistake occurs ‘when circumstances extrinsic to the litigation have unfairly cost a party a hearing on the merits.’ [Citation.] In contrast with extrinsic fraud, extrinsic mistake exists when the ground of relief is not so much the fraud or other misconduct of one of the parties as it is the excusable neglect of the defaulting party to appear and present his claim or defense. If that neglect results in an unjust judgment, without a fair adversary hearing, the basis for equitable relief on the ground of extrinsic mistake is present. [Citation.] Relief will be denied, however, if the complaining party's negligence permitted the fraud to be practiced or the mistake to occur.” (Manson, supra, 176 Cal.App.4th at p. 47, 97 Cal.Rptr.3d 522.)

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