A-Tek Mechanical, Inc. et al v. KHW Services, Inc. et al

Filing 19

ORDER denying 8 Motion to Dismiss for Failure to State a Claim. Signed by Judge Marilyn L. Huff on 8/1/2022. (jms)

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UNITED STATES DISTRICT COURT

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SOUTHERN DISTRICT OF CALIFORNIA

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A-TEK MECHANICAL, INC., CURLY
PHOM,
Plaintiffs,

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Case No.: 3:21-cv-01974-H-WVG
ORDER DENYING DEFENDANTS’
MOTION TO DISMISS

v.
[Doc. No. 8.]

KHW SERVICES, INC., JEFF
NEWTON, SARAH NETWON,
Defendants.

On November 22, 2021, Plaintiffs A-Tek Mechanical (“A-Tek”) and Curly Phom
(collectively, “Plaintiffs”) filed a complaint against Defendants KHW Services, Inc.
(“KHW”), Jeff Newton, and Sarah Newton (collectively, “Defendants”). (Doc. No. 1,
Compl.) On January 19, 2022, Defendants filed a motion to dismiss Plaintiffs’ complaint
for failure to state a claim pursuant to Federal Rule of Civil Procedure 12(b)(6). (Doc. No.
8-1.) On February 16, 2022, Plaintiffs filed an opposition to Defendants’ motion. (Doc.
No. 13.) On February 18, 2022, Defendants filed a reply. (Doc. No. 15). On April 8, 2022,

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the Court took the matter under submission pursuant to Local Rule 7.1(d)(1). (Doc. No.

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17.) For the reasons that follow, the Court denies Defendants’ motion to dismiss.
BACKGROUND1

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Plaintiff A-Tek is a California corporation that specializes in the design, installation,

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and maintenance of heating, ventilation, and air conditioning (“HVAC”). (Compl. ¶¶ 10,

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17.) Plaintiff Phom is a California resident and the owner and founder of A-Tek. (Id. ¶¶ 10,

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19.) Defendants Jeff and Sarah Newton are Colorado residents and the founders of

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Defendant KHW, a Colorado corporation and consulting firm. (Id. ¶¶ 10, 35.)

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The relationship between Plaintiffs and Defendants began in 2013, when A-Tek

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hired Jeff and Sarah Newton. (Id. ¶¶ 23, 25–27.) Jeff Newton was hired to work on A-

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Tek’s management and estimating projects while Sarah Newton was to assist with A-Tek’s

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accounting. (Id.) During the first year at A-Tek, Jeff and Sarah Newton were allegedly

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employees of A-Tek and were compensated directly from A-Tek’s payroll. (Id. ¶ 33.) In

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2014, Jeff and Sarah Newton founded KHW and began working for A-Tek as consultants

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rather than employees. (Id.) In April 2017, Jeff Newton, Sarah Newton, and KHW

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relocated from California to Colorado. (Id. ¶ 43.) On July 24, 2017, Jeff and Sarah Newton

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each signed a Confidentiality Agreement with A-Tek. (Id. ¶ 97.) The Confidentiality

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Agreement allegedly prohibited Jeff and Sarah Newton from disclosing “confidential,

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propriety, and trade secret information belonging to [A-Tek].” (Id. ¶¶ 97–98.)

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During this time, Plaintiffs allege Defendants began working with other companies

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in A-Tek’s industry. In 2016, Plaintiffs allege Jeff Newton began working with

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Prodecomm Engineering (“Prodecomm”), a design engineering firm, as Prodecomm’ pre-

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construction mechanical engineering support consultant. (Id. ¶ 49.) Plaintiffs allege Jeff

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Newton worked full-time for both A-Tek and Prodecomm, but A-Tek continued to

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compensate Jeff Newton for a forty-hour work week. (Id. ¶¶ 52, 55.) Plaintiffs allege that

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due his split time between A-Tek and Prodecomm, Jeff Newton became less involved in

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The following allegations are taken from Plaintiffs’ complaint.
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the day-to-day affairs of A-Tek. (Id. ¶¶ 52–54.) Plaintiffs allege Jeff Newton began making

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“several large errors on bids” for A-Tek, including failing to confirm quotes,

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underbudgeting bids, and not accounting for certain material and labor costs on several

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projects. (Id. ¶¶ 52–54, 56, 82, 84–94.) Plaintiffs allege that one of A-Tek’s client, Harper

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Construction, refused to compensate A-Tek for $250,000 worth of work performed on an

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Edwards Air Force Base project after learning Jeff Newton was working for both A-Tek

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and Prodecomm on the project. (Id. ¶ 54.)

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In 2019, Plaintiffs allege Jeff Newton began working with Sphere Mechanical, a

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direct competitor of A-Tek, and Thomas Pozananski, Sphere Mechanical’s owner. (Id. ¶

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57.) Between 2019 and 2021, Jeff Newton was allegedly responsible for submitting all of

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A-Tek’s contract bids. (Id. ¶ 77.) Plaintiffs allege that while Jeff Newton was working with

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A-Tek, Jeff Newton blind copied Pozananski on A-Tek’s bid proposals and equipment and

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supplier quotes to help Sphere Mechanical out-bid A-Tek. (Id. ¶¶ 59, 60, 62–63.) Jeff

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Newton allegedly notified some of the general contractors A-Tek worked with that A-Tek

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would not be submitting bids on projects that A-Tek did intend to bid for in order to help

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Sphere Mechanical. (Id. ¶ 62.) Jeff Newton allegedly also used A-Tek’s client base and

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network to market Sphere Mechanical’s services. (Id.) Sphere Mechanical allegedly

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offered Jeff Newton the position of Vice President of Sphere Mechanical while Jeff

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Newton was still working with A-Tek. (Id. ¶ 58.) Plaintiffs allege they were unaware of

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Jeff Newton’s relationship with Sphere Mechanical and actions on behalf of Sphere

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Mechanical until after Jeff Newton was fired from A-Tek. (Id. ¶¶ 57, 73–75, 79.)

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Around 2017, Plaintiffs allege A-Tek’s business began to suffer due to Jeff

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Newton’s financial advice, mistakes on bids, and split involvement with Prodecomm. (Id.

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¶ 44.) A-Tek was allegedly not awarded any contracts between 2019 and 2021, when Jeff

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Newton was responsible for submitting A-Tek’s bids. (Id. ¶¶ 75–77.) Plaintiffs allege they

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originally believed A-Tek’s lack of contracts was due to the COVID-19 pandemic. (Id. ¶

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75.) However, after learning of Jeff Newton’s relationship with Sphere Mechanical,

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Plaintiffs allege Jeff Newton worked to divert bids from A-Tek to Sphere Mechanical,
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causing A-Tek’s financial distress. (Id. ¶ 75.)

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In August 2021, A-Tek terminated its relationship with Defendants. (Id. ¶ 64.) On

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August 27, 2021, A-Tek restricted Jeff Newton’s access to his email account and A-Tek’s

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company server files. (Id. ¶ 72.) Plaintiffs allege they reviewed Jeff Newton’s emails and

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discovered Jeff Newton’s relationship with Sphere Mechanical and Pozananski. (Id. ¶¶ 72–

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73, 79.) Plaintiffs also allege Jeff Newton “had been engaging in communications with

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several potential investors regarding plans for [Jeff Newton] to take over [A-Tek].” (Id. ¶

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95.) Plaintiffs allege Jeff Newton’s actions were intended to “create[] the appearance that

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[A-Tek] was unprofitable” so Jeff Newton could “intentionally sabotaged [A-Tek’s]

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operations to buy out the company at a cheaper price.” (Id.) Plaintiffs also allege Jeff

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Newton attempted to recruit some of A-Tek’s employees. (Id. ¶ 96.)

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After A-Tek terminated Defendants in August 2021, A-Tek sent KHW an End-of-

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Service notice. (Id. ¶¶ 65–66.) The End-of-Service notice requested KHW send A-Tek a

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final invoice, return A-Tek’s computers and accessories A-Tek had provided Defendants,

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and delete A-Tek’s intellectual property and discontinue accessing A-Tek’s company files

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and software. (Id.) In response, Defendants allegedly sent A-Tek an non-itemized final

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invoice for $20,500, which was significantly higher than the $1,090.36 final invoice A-Tek

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projected it owed KHW. (Id. ¶¶ 67, 70.) Defendants allegedly also filed a preliminary

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mechanic’s lien on one of A-Tek’s current projects. (Id. ¶ 67.) Defendants allegedly have

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not return any of A-Tek’s equipment and notified Plaintiffs that they will retain A-Tek’s

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property as collateral until A-Tek pays the invoice. (Id. ¶¶ 67–69.)

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On January 29, 2022, Plaintiff filed a complaint in federal court under diversity

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jurisdiction alleging twelve state law causes of action against Defendants: (1) alter ego; (2)

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breach of contract; (3) breach of the covenant of good faith and fair dealing; (4) breach of

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fiduciary duty; (5) trespass to chattels; (6) fraud; (7) violation of California’s Unfair

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Competition Law (“UCL”), Cal. Bus. & Prof. Code § 17200, et seq.; (8) intentional

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interference with existing contract; (9) intentional interference with prospective economic

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advantage; (10) unjust enrichment and constructive trust; (11) declaratory relief; and (12)
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injunctive relief. (Doc. No. 1.) On February 14, 2022, Plaintiffs filed the present motion to

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dismiss. (Doc. No. 8.) On February 16, 2022, Plaintiffs filed an opposition, (Doc. No. 13),

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and on February 18, 2022, Defendants filed a reply. (Doc. No. 15)

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DISCUSSION
I.

Legal Standards

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A. Federal Rule of Civil Procedure 12(b)

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A motion to dismiss under Federal Rule of Civil Procedure 12(b)(6) tests the legal

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sufficiency of the pleadings and allows a court to dismiss a complaint if the plaintiff has

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failed to state a claim upon which relief can be granted. See Conservation Force v. Salazar,

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646 F.3d 1240, 1241–42 (9th Cir. 2011). In reviewing a Rule 12(b)(6) motion to dismiss,

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“[a] claim has facial plausibility when the plaintiff pleads factual content that allows the

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court to draw the reasonable inference that the defendant is liable for the misconduct

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alleged.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). “Factual allegations must be enough

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to raise a right to relief above the speculative level.” Bell Atlantic Corp. v. Twombly, 550

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U.S. 544, 545 (2007). However, “[d]ismissal under Rule 12(b)(6) is appropriate only where

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the complaint lacks a cognizable legal theory or sufficient facts to support a cognizable

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legal theory.” Mendiondo v. Centinela Hosp. Med. Ctr., 521 F.3d 1097, 1104 (9th Cir.

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2008) (citation omitted).

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In reviewing the plausibility of a complaint on a motion to dismiss, courts “accept

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factual allegations in the complaint as true and construe the pleadings in the light most

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favorable to the nonmoving party.” Manzarek v. St. Paul Fire & Marine Ins. Co., 519 F.3d

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1025, 1031 (9th Cir. 2008). Courts are not “required to accept as true allegations that are

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merely conclusory, unwarranted deductions of fact, or unreasonable inferences.” In re

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Gilead Scis. Secs. Litig., 536 F.3d 1049, 1055 (9th Cir. 2008).

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B. Federal Rule of Civil Procedure 9(b)

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Claims sounding in fraud are subject to the heightened pleading requirements

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of Rule 9(b) of the Federal Rules of Civil Procedure. Rule 9(b) provides that “[i]n alleging

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fraud or mistake, a party must state with particularity the circumstances constituting fraud
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or mistake. Malice, intent, knowledge, and other conditions of a person’s mind may be

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alleged generally.” Fed. R. Civ. P. 9(b). “Rule 9(b) demands that the circumstances

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constituting the alleged fraud ‘be specific enough to give defendants notice of the particular

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misconduct…so that they can defend against the charge and not just deny that they have

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done anything wrong.’” Kearns v. Ford Motor Co., 567 F.3d 1120, 1124 (9th Cir. 2009)

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(citation omitted). “Averments of fraud must be accompanied by ‘the who, what, when,

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where, and how’ of the misconduct charged.” Vess v. Ciba-Geigy Corp. USA, 317 F.3d

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1097, 1106 (9th Cir. 2003) (citation omitted). “The plaintiff must set forth what is false or

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misleading about a statement, and why it is false.” Id.

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II. Analysis

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A. Claims Brought by Plaintiff Phom

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Defendants argue that Plaintiff Phom should be dismissed because the causes of

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action alleged in the complaint belong exclusively to A-Tek as a corporation, not Plaintiff

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Phom individually. (Doc. No. 8-1 at 10–11.) Under federal permissive joinder rules,

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“[p]ersons may join in one action as plaintiffs if: (A) they assert any right to relief jointly,

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severally, or in the alternative with respect to or arising out of the same transaction,

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occurrence, or series of transaction or occurrences; and (B) any question of law or fact

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common to all plaintiffs will arise in the action.” Fed. R. Civ. P. 20(a)(1). Rule 20(a) “is

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to be construed liberally in order to promote trial convenience and to expedite the final

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determination of disputes, thereby preventing multiple lawsuits.” League to Save Lake

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Tahoe v. Tahoe Reg’l Planning Agency, 559 F.2d 914, 917 (9th Cir. 1977). “[T]he impulse

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is towards entertaining the broadest possible scope of action consistent with fairness to the

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parties; joinder of claims, parties and remedies is strongly encouraged.” Id. (quoting United

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Mine Workers of Am. v. Gibbs, 383 U.S. 716, 724 (1966)).

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Plaintiffs allege that Plaintiff Phom was the owner of A-Tek at the relevant time

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period, that Plaintiff Phom was “personally liable for all of [A-Tek’s] debts and financial

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liabilities,” and that Plaintiff Phom’s personal credit score was affected by A-Tek financial

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distress resulting from Defendants’ actions. (Compl. ¶ 46.) Accordingly, the Court declines
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to dismiss Plaintiff Phom from this action at this time. Defendants’ arguments are more

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appropriate for a motion for summary judgment when the record is more fully developed.

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B. Plaintiffs’ Pre-August 2017 Claims Against Defendant KHW

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Defendants also challenge all claims against Defendant KHW that predate August

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2017. (Doc. No. 8-1 at 45.) Specifically, Defendants allege that between July 2014 and

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July 2017 a separate KHW entity was incorporated in California under the KHW name.

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(Id. at 4.) Defendants argue the California KHW was dissolved in July 2017, and Defendant

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KHW was incorporated in Colorado in August 2017. (Id.) Defendants argue Plaintiffs

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errored in not distinguishing between the two separate KHW entities in the complaint and

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improperly alleged operative facts against the Colorado KHW that pre-date its

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incorporation in August 2017. (Id.) Defendants allege that Plaintiff cannot join the

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dissolved California KHW without destroying diversity jurisdiction and so any claims

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based on acts by the Colorado KHW before August 2017 should be dismissed. (Id. at 5.)

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Successor liability is an equitable doctrine that allows liability to “flow[] from one

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corporation to another corporation.” Cleveland v. Johnson, 147 Cal. Rptr. 3d 772, 782 (Ct.

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App. 2012). In California, a purchasing corporation assumes the seller’s liabilities if “the

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purchasing corporation is a mere continuation of the selling corporation.” Brown Bark III,

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L.P. v. Haver, 162 Cal. Rptr. 3d 9, 20 (Ct. App. 2013). Under the “continuation theory” of

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successor liability, “corporations cannot escape liability by mere change of name or a shift

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in assets when and where it is shown that the new corporation is, in reality, but a

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continuation of the old.” Cleveland, 147 Cal. Rptr. 3d at 781–82. Successor liability based

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on “mere continuation” requires “a showing of one or both of the following factual

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elements: (1) no adequate consideration was given for the predecessor corporation’s assets

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and made available for meeting the claims of its unsecured creditor; (2) one or more

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persons were officers, directors, or stockholder of both corporations.” Id. at 782 (quoting

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Ray v. Alad Corp., 560 P.3d 3, 7 (Cal. 1977)).

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Plaintiffs did not address successor liability in their complaint or opposition.

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However, at the motion to dismiss stage, Plaintiffs have adequately plead that the Colorado
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KHW is a successor-in-interest to the dissolved California KHW. Plaintiffs allege Jeff and

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Sarah Newton founded KHW in 2014. (Compl. ¶ 35.) Plaintiffs allege that in April 2017,

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Jeff and Sarah Newton relocated to Yuma, Colorado and so “consequently, Defendant

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KHW…relocated to Yuma, Colorado.” (Id. ¶ 43.) Plaintiffs allege, and Defendants do not

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dispute, that the dissolved California KHW and Colorado KHW were run solely by Jeff

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and Sarah Newton and KHW maintained A-Tek as a client through the dissolution and

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reincorporation. (Id. ¶ 43.) Public filings indicate that Sarah Newton was the director of

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the California KHW and is the registered agent and incorporator of the Colorado KHW.2

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Public filings also indicate that the California KHW was dissolved on July 25, 2017, a few

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days before the Colorado KHW was incorporated on August 1, 2017.3 As a result, the Court

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declines to dismiss claims against KHW that predate its incorporation in Colorado in 2017.

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C. Plaintiffs’ Covenant of Good Faith and Fair Dealing Claim

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In the complaint, Plaintiffs assert a breach of the covenant of good faith and fair

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dealing claim based on the Confidentiality Agreements allegedly executed between Jeff

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and Sarah Newton and A-Tek on July 24, 2017. (Compl. ¶¶ 118–25.) Defendants argue

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that Plaintiffs’ breach of the covenant of good faith and fair dealing claim should be

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dismissed because it duplicates its breach of contract claim. (Doc. No. 8-1 at 14–15.)

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“Every contract imposes upon each party a duty of good faith and fair dealing in its

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performance and its enforcement.” Foley v. Interactive Data Corp., 765 P.2d 373, 389 (Cal.

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1988). The implied covenant of good faith and fair dealing in every contract obligates “that

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neither party will do anything which will injure the right of the other to receive the benefits

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of the agreement.” Comunale v. Traders & Gen. Ins. Co., 328 P.2d 198, 200 (Cal. 1958);

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Defendants request the Court take judicial notice of public records available on the California and
Colorado Secretary of State website. (Doc. No. 8-2.) “Under Fed. R. Evid. 201, a court may take judicial
notice of ‘matters of public record.’” Lee v. City of Los Angeles, 250 F.3d 668, 689 (9th Cir. 2001). The
Court takes judicial notice of (1) the Articles of Incorporation for KHW Service, Inc. accessed from the
Colorado Secretary of State website and (2) the Services Certificate of Dissolution for KHW Service,
Inc. accessed from the California Secretary of State website. See, e.g., eBay Inc. v. Digital Point
Solutions, Inc., 608 F.Supp.2d 1156, 1164 n.6 (N.D. Cal. 2009).
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Id.
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see also Thrifty Payless, Inc. v. The Americana at Brand, LLC, 160 Cal. Rptr. 3d 718, 729–

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30 (Ct. App. 2013) (“The covenant is read into contract and functions ‘as a supplement to

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the express contractual covenants, to prevent a contracting party from engaging in conduct

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which (while not technically transgressing the express covenants) frustrates the other

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party’s rights to the benefits of the contract.’” (citation omitted)).

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To assert a claim for the breach of the covenant of good faith and fair dealing,

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plaintiffs “must show that the conduct of the defendant, whether or not it also constitutes a

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breach of a consensual contract term, demonstrates a failure or refusal to discharge

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contractual responsibilities, prompted not by an honest mistake, bad judgement or

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negligence but rather by a conscious and deliberate act.” Careau & Co. v. Sec. Pac. Bus.

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Credit, Inc., 222 Cal. App. 3d 1371, 1395 (1990). Such conduct must “unfairly frustrate[]

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the agreed common purposes and disappoint[] the reasonable expectations of the other

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party thereby depriving that party of the benefits of the agreement.” Id. But “[i]f the

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allegations do not go beyond the statement of a mere contract and, relying on the same

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alleged acts, simply seek the same damages or other relief already claimed in a companion

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contract cause of action, they may be disregarded as superfluous as no additional claim is

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actually stated.” Id.

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Plaintiffs have sufficiently alleged a breach of the covenant of good faith and fair

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dealing claim against Defendants. Plaintiffs allege Jeff and Sarah Newton each executed a

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Confidentiality Agreement with A-Tek on July 24, 2017. (Compl. ¶¶ 118–25.) As a result,

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Plaintiffs have sufficiently alleged that contracts existed between Defendants and A-Tek,

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and Defendants each had “a duty of good faith and fair dealing in its performance and its

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enforcement.” Foley, 765 P.2d at 390. Plaintiffs have sufficiently alleged Defendants

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violated this duty through “(1) knowingly and willfully competing with Plaintiffs, (2)

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sending Plaintiffs’ bid proposals to direct competitors, (3) directing Plaintiffs’ clients to

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competitors; (4) colluding with Plaintiffs’ competitors with the intent of directing business

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opportunities away from Plaintiffs, (5) working for and/or accepting employment with a

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direct competitor of Plaintiffs while bound by the terms of the Confidentiality Agreement,
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[and] (6) misappropriating Plaintiff’s proprietary and confidential information for the

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benefit of Plaintiffs’ competitors.” (Compl. ¶ 131.)

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Further, taking the allegations in the light most favorable to Plaintiffs, Plaintiffs’

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breach of the covenant of good faith and fair dealings claim is not “duplicative” or

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“superfluous” of Plaintiffs’ breach of contract claim because Plaintiffs have sufficiently

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alleged Defendants acted knowingly and “in bad faith to frustrate the [Confidentiality

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Agreements’] benefits.” Celador Intern. Ltd. v. Walt Disney Co., 347 F. Supp. 2d 846,

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852–53 (C.D. Cal. 2014) (citations omitted) (“Even if Plaintiffs are not ultimately

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successful on their breach of contract claim, they may still be able to prevail on their breach

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of the covenant of good faith and fair dealing claim….because the fact finder could

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conclude that the actions of Defendants frustrated a benefit of the contract.”). The Court

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therefore declines to dismiss Plaintiffs’ breach of the covenant of good faith and fair

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dealing claim. Defendants’ arguments are more appropriate on a motion for summary

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judgment when the record is more fully developed.

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D. Plaintiffs’ Fiduciary Duty Claim

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In the complaint, Plaintiffs allege a breach of fiduciary duty claim against

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Defendants. (Compl. ¶¶ 134–45.) Defendants argue Plaintiffs have not alleged sufficient

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facts to support that a fiduciary relationship existed between Plaintiffs and Defendants and

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so Plaintiffs’ breach of fiduciary duty claims should be dismissed. (Doc. No. 8-1 at 15–

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17.)

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“The elements of cause of action for breach of fiduciary duty are the existence of a

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fiduciary relationship, its breach, and damage proximately caused by that breach.” Knox

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v. Dean, 140 Cal. Rptr. 3d 569, 582–83 (Ct. App. 2012). “Traditional examples of fiduciary

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relationships in the commercial context include trustee/beneficiary, directors and majority

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shareholders of a corporation, business partners, joint adventurers, and agent/principal.”

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Wolf v. Super. Ct., 107 Cal. App. 4th 25, 29 (2003). “Inherent in each of these relationships

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is the duty of undivided loyalty the fiduciary owes to its beneficiary, imposing on the

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fiduciary obligations far more stringent than those required of ordinary contractors.” Id.
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“An agent is one who represents another, called the principal, in dealings with third

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persons…Whether a person performing work for another is an agent…depends primarily

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upon whether the one for whom the work is done has the legal right to control the activities

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of the alleged agent.” Michelson v. Hamada, 29 Cal. App. 4th 1566, 1579 (1994) (internal

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citations and quotations omitted). Whether an individual is an agent is a factual question.

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See Rookard v. Mexicoach, 680 F.2d 1257, 1261 (9th Cir. 1982).

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Plaintiffs have sufficiently alleged a breach of fiduciary duty claim against

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Defendants. First, Plaintiffs have sufficiently alleged Defendants were in a fiduciary

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relationship with Plaintiffs. In the complaint, Plaintiffs reference the agent/principal

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relationship as the basis of Defendants’ fiduciary relationship. (Compl. ¶¶ 137–39.)

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Plaintiffs allege Jeff Newton was given an A-Tek email address, (id. ¶¶ 72–73), Jeff

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Newton was responsible for submitting contract bids on behalf of A-Tek, (id. ¶ 77), and

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Jeff Newton communicated with general contractors on behalf of A-Tek and held himself

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out as speaking on behalf of A-Tek. (Id. ¶ 62.) Plaintiffs also allege Sarah Newton worked

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as A-Tek’s accountant. (Id. ¶¶ 26–27.) Viewed in the light most favorable to Plaintiffs,

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these allegations could give rise to a reasonable inference that an agent-principal

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relationship was created between Defendants and A-Tek. Second, Plaintiffs sufficiently

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alleged this fiduciary relationship was breached when Defendants forwarded A-Tek’s bid

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proposals to A-Tek’s competitor, Sphere Mechanical, and used A-Tek’s confidential

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information to aid Sphere Mechanical. (Id. ¶ 142.) Third, Plaintiffs allege Defendants’

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actions caused A-Tek mechanical to lose contract bids. (Id. ¶ 77.) Accordingly, the Court

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declines to dismiss Plaintiffs’ breach of fiduciary duty claims. Defendants’ arguments are

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more appropriate for a motion for summary judgment when the record is more fully

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developed.

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E. Plaintiffs’ Trespass to Chattels Claim

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In the complaint, Plaintiffs allege trespass to chattels claims against Defendants.

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(Compl. ¶¶ 146–58.) Defendants argue Plaintiffs’ trespass to chattels claims does not meet

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the pleading standard of Federal Rule of Civil Procedure 8(a) because Plaintiffs did not
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indicate which items of Defendants’ property were subject to trespassed. (Doc. No. 8-1 at

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9–10.)

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“Under California law, trespass to chattels ‘lies where an intentional interference

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with the possession of personal property has proximately caused injury.’” Intel Corp. v.

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Hamidi, 71 P.3d 296, 302 (Cal. 2003) (citation omitted). “[S]ome actual injury must have

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occurred in order for a trespass to chattels to be actionable” and a plaintiff “may recover

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only the actual damages suffered by reason of the impairment of the property or the loss of

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its use.” Id.

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Plaintiffs have sufficiently alleged a trespass to chattels claim against Defendants.

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Plaintiffs allege that when Plaintiffs terminated their business relationship with

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Defendants, Defendants informed Plaintiffs they were retaining A-Tek’s property as

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collateral until they were paid the final invoice. (Compl. ¶¶ 67–68, 151.) Plaintiffs allege

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this property included Plaintiffs’ computers, computer software and programs, equipment,

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and tools. (Id. ¶¶ 151–53, 155.) Plaintiffs allege that Defendants retained Plaintiffs’

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property without consent and refused to return Plaintiffs’ property when Plaintiffs’ sent

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Defendants an End-of-Service notice. (Id. ¶ 154.) Plaintiffs allege Defendants’ conduct has

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prevented Plaintiffs from using their property in their business, causing Plaintiffs to lose

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profits they would have realized through the use of their property. (Id. ¶ 155.) Taking the

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allegations in the light most favorable to Plaintiffs, Plaintiffs have alleged sufficient facts

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to support their trespass to chattels claim. As a result, the Court denies Defendants’ motion

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to dismiss Plaintiffs’ trespass to chattels claim.

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F. Plaintiffs’ Fraud Claim

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In the complaint, Plaintiffs allege a fraud claim against Defendants. (Compl. ¶¶ 159–

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74.) Defendants argue Plaintiffs have not met the heightened pleading standard for fraud

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claims under Federal Rule of Civil Procedures 9(b) and so Plaintiffs’ fraud claim should

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be dismissed. (Doc. No. 8-1 at 5–9.)

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The elements of fraud are: “(a) misrepresentation (false representation, concealment,

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or nondisclosure); (b) knowledge of falsity (or ‘scienter’); (c) intent to defraud, i.e., to
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induce reliance; (d) justifiable reliance; and (e) resulting damage.” Engalla v. Permanente

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Med. Grp., Inc., 938 P.2d 903, 974 (Cal. 1997) (citation omitted). “A fraud claim based

3

upon the suppression or concealment of a material fact must involve a defendant who had

4

a legal duty to disclose the fact.” Hoffman v. 162 N. Wolfe LLC, 175 Cal. Rptr. 3d 820,

5

826 (Ct. App. 2014). “There are ‘four circumstances in which nondisclosure or

6

concealment may constitute actionable fraud: (1) when the defendant is in a fiduciary

7

relationship with the plaintiff; (2) when the defendant had exclusive knowledge of material

8

facts not know to the plaintiff; (3) when the defendant actively conceals a material fact

9

from the plaintiff; and (4) when the defendant makes partial representations but also

10

suppresses some material facts.’” LiMandri v. Judkins, 60 Cal. Rptr. 2d 539, 543 (Ct. App.

11

1997) (citation omitted). Other than when there is “a fiduciary relationship between the

12

parties, ‘the other three circumstances in which nondisclosure may be actionable

13

presuppose[] the existence of a relationship between the plaintiff and defendant in which a

14

duty to disclose can arise.” Hoffman, 175 Cal. Rptr. 3d at 827 (citation omitted). In the

15

later three circumstances, “a duty to disclose may arise from the relationship between seller

16

and buyer, employer and prospective employee, doctor and patient, or parties entering into

17

any kind of contractual agreement.” Id. (citation omitted).

18

Plaintiffs’ fraud claim is subject to the heightened pleading standard requirements

19

of Federal Rule of Civil Procedure 9(b). See Kearns, 567 F.3d at 1125. However, “because

20

a plaintiff brings fraud by omission claims ‘will not be able to specify the time, place, and

21

specific content of an omission as precisely as would a plaintiff in a false representation

22

claim,’ plaintiffs may plead fraud by omission by alternative means.” Mui Ho v. Toyota

23

Motor Corp., 931 F. Supp. 2d 987, 999 (N.D. Cal. 2013) (citation omitted).

24

Taking the allegations in the light most favorable to Plaintiffs, Plaintiffs have alleged

25

sufficient facts to support their fraud claim. Plaintiffs have alleged that at the time of the

26

alleged nondisclosure, Plaintiffs and Defendants had been in a multi-year business

27

relationship and had entered into contractual agreements that plausibly could give rise to a

28

duty to disclose. (Compl. ¶¶ 14, 27–28, 97–98.) Plaintiffs alleged Defendants failed to
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disclose their relationship with Sphere Mechanical when Defendants were working on

2

behalf of A-Tek. (Id. ¶¶ 164–66.) Plaintiffs alleged Defendants’ nondisclosure was

3

intended to induce Plaintiffs to continue to hire and compensate KHW for Jeff and Sarah

4

Newton’s services; to allow KHW to act on behalf of A-Tek in negotiating bid proposals,

5

projects, and contracts; and to ensure KHW maintained access to A-Tek’s computers,

6

software, and consumer lists. (Id. ¶¶ 172–73.) Plaintiffs alleged they relied on Defendants’

7

nondisclosure of their relationship with Sphere Mechanical in “not terminating the business

8

relationship with Defendants far sooner” and allowing Defendants to have “continued

9

access to [A-Tek’s] computers, software, and consumer lists.” (Id. ¶ 172.) Plaintiffs allege

10

they suffered damages resulting from diverted business opportunities and profits, the denial

11

of the opportunity to conduct business with current clients, the loss of bid awards, and the

12

loss of contracts. (Id. ¶¶ 165–68.) Accordingly, Defendants’ motion to dismiss Plaintiffs’

13

fraud claim is denied. Defendants’ arguments are more appropriate for a motion for

14

summary judgment when the record is more fully developed.

15

G. California Unfair Competition Law (“UCL”) Claim

16

In the complaint, Plaintiffs allege a claim under California’s Unfair Competition

17

Law (“UCL”), Cal. Bus. & Prof. Code § 17200, et seq., against Defendants. (Id. ¶¶ 175–

18

80.) Defendants argue Plaintiffs’ UCL claim should be dismissed because Plaintiffs have

19

failed to allege a violation of a statute to constitutes an “unlawful” practice, that Plaintiffs

20

have failed to allege a covered “unfair” practice, and Plaintiffs’ have failed to sufficiently

21

alleged a “fraudulent” practice under the heightened pleading standard of Rule 9. (Doc.

22

No. 8-1 at 17–18.)

23

To bring a claim for a violation of California’s UCL, “a plaintiff must show either

24

an (1) ‘unlawful, unfair, or fraudulent business act or practice,’ or (2) ‘unfair, deceptive,

25

untrue or misleading advertising.’” Lippitt v. Raymond James Fin. Servs., 340 F.3d 1033,

26

1043 (9th Cir. 2003) (quoting Cal. Bus. & Prof. Code § 17200). The UCL’s coverage is

27

“sweeping,” and its standard for wrongful business conduct is “intentionally broad.” In re

28

First Alliance Mortg. Co., 471 F.3d 977, 995 (9th Cir. 2006) (citation omitted). An
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“unlawful” practice under the UCL is a business practice that “is forbidden by law.” Cel-

2

Tech Commc’ns, Inc. v. Los Angeles Cellular Tel. Co., 973 P.2d 527, 560 (Cal. 1999).

3

An “unfair” practice is a business practice that “offends an established public policy

4

or…is immoral, unethical, oppressive, unscrupulous or substantially injurious to

5

consumers.” Id.; see also Day v. AT&T Corp., 74 Cal. Rptr. 2d 55, 59 (App. Ct. 1998)

6

(“An ‘unfair’ practice under section 17200 is one ‘whose harm to the victim outweighs it

7

benefits.’”). “A fraudulent business practice is one that is likely to deceive members of the

8

public.” Boschma v. Home Loan Ctr., Inc., 129 Cal. Rptr. 3d 874, 893 (App. Ct. 2011)

9

(citation omitted). “The challenged conduct ‘is judged by the effect it would have on a

10

reasonable consumer.’” Davis v. HSBC Bank Nev., N.A., 691 F.3d 1152, 1169 (9th Cir.

11

2012). But “[u]nlike common law fraud, a [UCL] violation can be shown even without

12

allegations of actual deception, reasonable reliance and damage.” Daugherty v. Am. Honda

13

Motor Co., Inc., 51 Cal. Rptr. 3d 118, 128 (App. Ct. 2006). “Absent a duty to disclose, the

14

failure to do so does not support a claim under the fraudulent prong of the UCL.” Berryman

15

v. Merit Prop. Mgmt., Inc., 62 Cal. Rptr. 3d 177, 188 (App. Ct. 2007). The heightened

16

pleading standard of Fed. R. Civ. P. 9(b) applies to UCL claims brought under a fraud

17

theory. Kearns, 567 F.3d at 1125.

18

Taking the allegations in the light most favorable to Plaintiffs, Plaintiffs have alleged

19

sufficient facts to support an UCL claim under the “fraudulent” business practices prong.

20

Because Plaintiffs have sufficiently alleged facts to support its common law fraud claim,

21

Plaintiffs have also sufficient plead its UCL claim under the fraudulent prong. See

22

Bouchma, 129 Cal. Rptr. 3d at 874 n.12 (holding that because the defendant adequately

23

plead a common law fraud claim, the defendant also adequately pled a UCL claim under

24

the fraudulent prong because the fraudulent prong claim “is easier to prove in the section

25

17200 context”). As a result, the Court denies Defendants’ motion to dismiss Plaintiffs’

26

UCL claim. Defendants’ arguments are more appropriate on a motion for summary

27

judgment when the record is more fully developed.

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////
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H. Plaintiffs’ Intentional Interference with Existing Contract Claim

2

In the complaint, Plaintiffs allege an intentional interference with existing contract

3

claim against Defendants. (Compl. ¶¶ 191–200.) Defendants argue that Plaintiffs have not

4

alleged any intentional acts committed by Defendants designed to induce a breach of a

5

third-party contract and so Plaintiffs’ intentional interference with an existing contract

6

claim should be dismissed. (Doc. No. 8-1 at 19.)

7

“Tortious interference with contractual relations requires ‘(1) the existence of a valid

8

contract between the plaintiff and a third party; (2) the defendant’s knowledge of that

9

contract; (3) the defendant’s intentional acts designed to induce a breach of disruption of

10

the contractual relationship; (4) actual breach or disruption of the contractual relationship;

11

and (5) resulting damages.” Ixchel Pharma, LLC v. Biogen, Inc., 471 P.3d 571, 575 (Cal.

12

2020). “An actionable claim for interference with contractual relationships does not require

13

that the defendant have the specific intent to interference with a contract. A plaintiff states

14

a claim so long as it alleges that the defendant knew interference was ‘certain or

15

substantially certain to occur as a result of [defendant’s] action.’” Id. at 675–76 (citation

16

omitted).

17

Construing the allegations in the light most favorable to Plaintiffs, Plaintiffs have

18

sufficiently alleged an intentional interference with existing contract claim against

19

Defendants. Plaintiffs allege Defendants interfered with the existing contract between A-

20

Tek and Harper Construction for a project on the Edwards Air Force Base and that

21

Defendants knew of the Harper Construction contract through working on it on behalf of

22

A-Tek. (Compl. ¶¶ 50–51, 54, 188.) Plaintiffs allege Jeff Newton also worked on behalf of

23

Prodecomm on the Edwards Air Force Base project. (Id. ¶¶ 50–51.) Plaintiffs allege Harper

24

Construction refused to compensate A-Tek $250,000 for the project after learning that Jeff

25

Newton was working for both A-Tek and Prodecomm on the Edwards Air Force Based

26

project. (Id. ¶ 54.) To state a claim for intentional interference with existing contract, “it is

27

not necessary that the defendant’s conduct be wrongful apart from the interference with the

28

contract itself.” Quelimane Co.v. Stewart Title Guar. Co., 960 P.2d 513, 530 (Cal. 1998).
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As a result, Defendants’ motion to dismiss Plaintiffs’ intentional interference with existing

2

contract claim against Jeff Newton and HKW is denied. Defendants’ arguments are more

3

appropriate on a motion for summary judgment when the record is more fully developed.

4

I. Intentional Interference with Prospective Economic Advantage Claim

5

In the complaint, Plaintiffs allege an intentional interference with prospective

6

economic advantage against Defendants. (Compl. ¶¶ 181–90.) Defendants argue that

7

Plaintiffs have not alleged any intentional acts committed by Defendants designed to

8

disrupt an existing relationship or any economic harm suffered by Plaintiffs as a result of

9

Defendants’ actions, and so Plaintiffs’ intentional interference with an existing contract

10

claim should be dismissed. (Doc. No. 8-1 at 19–20.)

11

“The tort of interference with prospective economic advantage protects the same

12

interest in stable economic relationships as does the tort of interference with contract,

13

though interference with prospective advantage does not require proof of a legally binding

14

contract.” Pacific Gas & Elec. Co. v. Bear Stearns & Co., 791 P.2d 587, 590 (Cal. 1990).

15

“The chief practical distinction between interference with contract and interference with

16

prospective economic advantage is that a broader range of privilege to interfere is

17

recognized when the relationship or economic advantage interfered with is only

18

prospective.” Id. “Intentional interference with prospective economic advantage has five

19

elements: (1) the existence, between the plaintiff and some third party, of an economic

20

relationship that contains the probability of future economic benefit to the plaintiff; (2) the

21

defendant’s knowledge of the relationship; (3) intentionally wrongful acts designed to

22

disrupt the relationship; (4) actual disruption of the relationship; and (5) economic harm

23

proximately caused by the defendant’s action.” Roy Allan Slurry Seal, Inc. v. Am. Asphalt

24

S., Inc., 388 P.3d 800, 803 (Cal. 2017). “The tort’s requirements ‘presuppose the

25

relationship existed at the time of the defendant’s alleged tortious acts lest liability be

26

imposed for actually and intentionally disrupting a relationship which has yet to arise.” Id.

27

at 807–08. “Specific intent is not a required element of the tort of interference with

28

prospective economic advantage.” Korea Supply Co. v. Lockheed Martin Corp., 63 P.3d
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937, 951 (Cal. 2003). Unlike with an intentional interference with existing contract claim,

2

“a plaintiff seeking to recover damages for interference with prospective economic

3

advantage must plead as an element of the claim that the defendant’s conduct was

4

‘wrongful by some legal measure other than the fact of the interference itself.’” Ixchel, 470

5

P.3d at 576. “[I]t must be reasonably probable that the prospective economic advantage

6

would have been realized but for defendant’s interference.” Youst v. Longo, 729 P.2d 728,

7

733 (Cal. 1987) (citation omitted).

8

Plaintiffs have sufficiently alleged an intentional interference with prospective

9

economic advantage claim against Defendants. Plaintiffs allege A-Tek had an economic

10

relationship with Webcor, an alleged existing client of A-Tek. (Compl. ¶ 79.) Plaintiffs

11

allege Jeff Newton forwarded A-Tek’s bid proposals and blind copied Sphere Mechanical

12

on emails containing A-Tek’s bid information while he was responsible for submitting bids

13

on behalf of A-Tek during the time period A-Tek bid on the Webcor project. (Id. ¶¶ 73–

14

74, 77, 79.) Plaintiffs allege Jeff Newton provided A-Tek’s bid information to Sphere

15

Mechanical so Sphere Mechancial could submit more competitive bids on the same

16

projects as A-Tek. (Id. ¶ 77.) Plaintiffs allege A-Tek submitted a bid on a project with

17

Webcor in April 2021 but was not awarded the Webcor contract. (Id. ¶ 79.) Plaintiffs allege

18

they discovered an email sent by Jeff Newton on October 8, 2021 confirming Sphere

19

Mechanical received the Webcor contract. (Id.) Construing the allegations in the light most

20

favorable to Plaintiffs, a reasonable inference can be drawn that Defendants intentionally

21

and wrongfully interfered with A-Tek’s business relationship with Webcor by forwarding

22

A-Tek’s bids to Sphere Mechanical, resulting in A-Tek losing the Webcor project award

23

to Sphere Mechanical. As a result, the Court denies Defendants’ motion to dismiss

24

Plaintiffs’ intentional interference with prospective economic advantage. Defendants’

25

arguments are more appropriate for a motion for summary judgment when the record is

26

more fully developed.

27

J. Plaintiffs’ Alter Ego Claim

28

In the complaint, Plaintiffs assert an alter ego claim against all Defendants. (Compl.
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¶¶ 103–17.) Specifically, Plaintiffs argue that the Court should pierce the corporate veil

2

and disregard the corporate form to hold Defendants Jeff and Sarah Newton liable for A-

3

Tek’s conduct. (Id. ¶ 117.) Plaintiffs argue that without piercing the corporate veil, Plaintiff

4

will be unable to recover damages owed by Defendants. (Id.) Defendants argue Plaintiffs’

5

alter ego claim should be dismissed because alter ego is not an independent claim for relief

6

and Plaintiffs have not alleged sufficient facts to support imposing the alter ego doctrine in

7

this case. (Doc. No. 8-1 at 12–14.)

8

Under the alter ego doctrine, a court “will disregard the corporate entity and will hold

9

the individual shareholders liable for the actions of the corporation.” Mesler v. Bragg

10

Mgmt. Co., 702 P.3d 601, 606 (Cal. 1985). “The alter ego doctrine arises when a plaintiff

11

comes into court claiming that an opposing party is using the corporate form unjustly and

12

in derogation of the plaintiff’s interest.” Id. “A claim against a defendant, based on the alter

13

ego theory, is not itself a claim for substantive relief, e.g., breach of contract or to set aside

14

a fraudulent conveyance, but rather, procedural…” Ahcom, Ltd. v. Smeding, 623 F.3d

15

1248, 1251 (9th Cir. 2010) (citation omitted). “Instead of creating, enforcing, or

16

expounding on substantive duties, California’s alter ego doctrine merely acts as a

17

procedural mechanism by which an individual can be held jointly liable for the wrongdoing

18

of his or her corporate alter ego.” Double Bogey, L.P. v. Enea, 794 F.3d 1047, 1051–52

19

(9th Cir. 2015) (citation omitted).

20

For the alter ego doctrine to apply, a plaintiff must allege (1) that there is “such unity

21

of interest and ownership that the separate personalities of the corporation and the

22

individual no longer exist” and (2) that “if the acts are treated as those of the corporation

23

alone, an inequitable result will follow.” Mesler, 702 P.3d at 606 (citation omitted). To

24

plead inequity under the second prong, “a plaintiff must plead facts sufficient to

25

demonstrate that ‘conduct amounting to bad faith makes it inequitable for the corporate

26

owner to hide behind the corporate form.’” Stewart v. Screen Gems-EMI Music, Inc., 81

27

F. Supp. 3d 938, 963 (N.D. Cal. 2015) (citation omitted). “California courts have rejected

28

the view that the potential difficulty a plaintiff faces collecting a judgment is an inequitable
19
3:21-cv-01974-H-WVG

1

result that warrants application of the alter ego doctrine.” Neilson v. Union Bank of Cal.,

2

N.A., 290 F. Supp. 2d 1101, 1117 (C.D. Cal. 2003).

3

First, Plaintiffs have improperly attempted to assert the alter ego doctrine as a

4

substantive claim for relief in their complaint. See Ahcom, 623 F.3d at 1251. Second,

5

Plaintiffs have not sufficiently alleged that there is any inequitable result from recognizing

6

KHW’s separate corporate form necessitating the application of the alter ego doctrine in

7

this case. Plaintiffs’ breach of contract and breach of the covenant of good faith and fair

8

dealing claims are based on contracts directly between A-Tek and Jeff and Sarah Newton

9

in their individual capacity. (Compl. ¶¶ 120, 130.) Second, the remainder of Plaintiffs’

10

claims are tort claims brought against Defendants for alleged actions specifically taken by

11

Jeff and Sarah Newton. (Id. ¶¶ 134–209.) “A corporate ‘officer or director is, in general,

12

personally liable for all torts which he authorizes or directs or in which he participates,

13

notwithstanding that he acted as an agent of the corporation and not on his own behalf.”

14

Transgo, Inc. v. Ajac Transmission Parts Corp., 768 F.2d 1001, 1021 (9th Cir. 1985). As a

15

result, Jeff and Sarah Newton will not be able to “hide behind [KHW’s] corporate form”

16

for their own alleged tortious actions. See, e.g., Hawes v. Kabani & Co., Inc., 182 F. Supp.

17

3d 1134, 1144 (W.D. Wash. 2016). Accordingly, Defendants have not sufficiently alleged

18

that the alter ego doctrine is applicable or necessary in the present case.

19

K. Declaratory Relief

20

In the complaint, Plaintiffs request declaratory relief of “a judicial determination of

21

the respective rights and duties of the parties” so that “Plaintiffs may ascertain their rights

22

under the Confidentiality Agreement and the true identities, rights, and responsibilities of

23

the individual defendants and the entity defendant.” (Compl. ¶¶ 103–17.) Defendants argue

24

Plaintiffs have not alleged a controversy exists between the parties regarding the rights of

25

the parties under the Confidentiality Agreement and so Plaintiffs declaratory judgment

26

claim should be dismissed. (Doc. No. 8-1 at 20–21.)

27

Under the Declaratory Judgment Act, “[a]ny court of the United States, upon the

28

filing of the appropriate pleading, may declare the rights and other legal relations of any
20
3:21-cv-01974-H-WVG

1

interested party seeking such declaration, whether or not further relief is or could be

2

sought.” 28 U.S.C § 2201. “The Declaratory Judgment Act does not create any new

3

substantive rights in federal courts, but instead creates a procedure for adjudicating existing

4

rights.” People of California v. Kinder Morgan Energy Partners, L.P., 569 F. Supp. 2d

5

1703, 1091 (S.D. Cal. 2008). “For a district court, the appropriate inquiry is to determine

6

whether there are claims in the case that exist independent of any request for purely

7

declaratory relief; that is claims that would continue to exist if the request for a declaration

8

simply dropped from the case.” Id. (citation omitted); see also Cultiv8 Interest LLC v.

9

Rezai, 2:20-cv-05290-AB, 2020 WL 12893817, *9–10 (C.D. Cal. Oct. 15, 2020).

10

Plaintiffs’ declaratory relief claim is premised on Plaintiffs’ contract-based claims, and

11

Plaintiffs have sufficiently alleged their contract-based claims to survive a motion to

12

dismiss. As a result, Defendants’ motion to dismiss Plaintiffs’ claim for declaratory relief

13

is denied. While declaratory relief may ultimately be inappropriate in the present case,

14

Defendants’ arguments are more appropriate on a motion for summary judgment when the

15

record is more fully developed.

16

CONCLUSION

17

For the foregoing reasons, the Court denies Defendants’ motion to dismiss.

18

IT IS SO ORDERED.

19

DATED: August 1, 2022

20

MARILYN L. HUFF, District Judge
UNITED STATES DISTRICT COURT

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3:21-cv-01974-H-WVG