Michael Dennis vs Ralph I Iannelli et al

Case Number

18CV03317

Case Type

Hearing Date / Time

Fri, 06/21/2024 - 10:00

Nature of Proceedings

Demurrer; CMC

Tentative Ruling

For the reasons set forth below, defendants Montecito Bank & Trust and Janet Garufis’ demurrer to plaintiffs’ amended first amended complaint is sustained in part and overruled in part as follows:

1. The demurrer based on the statute of limitations is overruled.

2. The demurrer to the first cause of action for negligence, as pertaining to plaintiff Michael Dennis, is sustained with leave to amend.

3. The demurrer to the first cause of action for negligence, as it pertains to plaintiffs Marcia Bischoff and Lee Heller, is overruled.

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

5. The demurrers to the third, fourth, and fifth causes of action are sustained with leave to amend.

6. Plaintiffs shall file and serve their Second Amended Complaint no later than July 12, 2024.

Background:

This action commenced on July 3, 2018, by the filing of the original complaint by plaintiffs Michael Dennis (“Dennis”) and all those similarly situated against defendants Ralph T. Iannelli (“Iannelli”), Essex Capital Corporation (“Essex”), and Does 1 through 30. The complaint is a class action and sets forth causes of action for: (1) Negligence; (2) Violation of California Security Laws; (3) Negligence Per Se; (4) Fraud; and (5) Financial Elder Abuse.

On October 11, 2023, plaintiffs substituted defendants Janet Garufis (“Garufis”) for Doe 1 and Montecito Bank & Trust (“MBT”) for Doe 2.

On March 18, 2024, plaintiffs filed a first amended class action complaint (“FAC”) setting forth causes of action for: (1) Negligence by Class Representatives; (2) Negligence by Receiver Winkler; (3) Violation of California Security Laws; (4) Fraud and Aiding and Abetting Fraud; and (5) Financial Elder Abuse.

The FAC added Geoff Winker (“Winkler”), as receiver for Essex, as a plaintiff.

In essence, the complaint alleged that Essex and Iannelli committed securities fraud by defrauding investors into loaning money to Essex for its equipment leasing business.

On May 9, 2024, plaintiffs filed an Amended First Amended Class Action Complaint (“AFAC”) adding in Marcia Bischoff and Lee Heller as additional class representatives. The basic causes of action and allegations are unchanged.

Allegations against MBT and Garufis are essentially that they coordinated with Essex and Iannelli to allow the perpetration of the fraud.

MBT and Garufis now demur to each cause of action in the AFAC on the grounds that each cause of action is barred by the applicable statutes of limitation and that they do not state facts sufficient to state causes of action.

Plaintiffs oppose the demurrer.

MBT and Garufis filed their reply and a second request for judicial notice on June 13, 2024.

Analysis:

1. Requests for Judicial Notice

MBT and Garufis request that the court take judicial notice of the following documents: (1) Excerpts from Exhibit 4 of the declaration of Yolanda Ochoa in support of the Security and Exchange Commission’s (“SEC”) motion for preliminary injunction, appointment of a receiver, asset freezes, and other relief, filed on June 5, 2018 in SEC v. Iannelli, et al., Case No. 2:18-cv-05008-FMO-AFM (C.D. Cal.), Dkt. 5.; (2) The declaration of Rhonda Chang in support of the SEC’s motion for preliminary injunction, appointment of a receiver, asset freezes, and other relief, filed on June 5, 2018 in SEC v. Iannelli, et al., Case No. 2:18-cv-05008-FMO-AFM (C.D. Cal.), Dkt. 6; (3) Iannelli and Essex’s opposition to the SEC’ motion for preliminary injunction, appointment of a receiver, asset freezes, and other relief, filed on June 5, 2018 in SEC v. Iannelli, et al., Case No. 2:18-cv-05008-FMO-AFM (C.D. Cal.), Dkt. 20; (4) Iannelli’s declaration in support of his and Essex’s opposition to the SEC’s motion for preliminary injunction, appointment of a receiver, asset freezes, and other relief, filed on June 5, 2018 in SEC v. Iannelli, et al., Case No. 2:18-cv-05008-FMO-AFM (C.D. Cal.), Dkt. 20-2; (5) Report of Preliminary Accounting of Essex and recommendations of Winkler, filed on December 6, 2018, in SEC v. Iannelli, et al., Case No. 2:18-cv-05008-FMO-AFM (C.D. Cal.), Dkt. 60-1; (6) Winkler declaration in support of court-appointed monitor’s 45-day report, filed on December 6, 2018, in SEC v. Iannelli, et al., Case No. 2:18-cv-05008-FMO-AFM (C.D. Cal.), Dkt. 60-2; (7) Order regarding preliminary injunction, issued on December 6, 2018, in SEC v. Iannelli, et al., Case No. 2:18-cv-05008-FMO-AFM (C.D. Cal.), Dkt. 53; and (8) Excerpts of the videoconference deposition of Winkler, filed on December 12, 2022, in Winkler v. N2: 21-cv-07458-icholson et al., Case No. 2:21-cv-07458-FMO-SJR (C.D. Cal), Dkt. 35, Ex. 18.

By way of their reply, MBT and Garufis additionally request that the court take judicial notice of a February 15, 2024, order lifting the permanent injunction on pursuing claims against Iannelli.

Judicial notice may be taken of “[r]ecords of (1) any court of this state or (2) any court of record of the United States or any state of the United States.” (Evid. Code, § 452, subd. (d).)

“ ‘Judicial notice may not be taken of any matter unless authorized or required by law.’ ” (Evid. Code, § 450.) Matters that are subject to judicial notice are listed in Evidence Code sections 451 and 452. A matter ordinarily is subject to judicial notice only if the matter is reasonably beyond dispute. [Citation.] Although the existence of a document may be judicially noticeable, the truth of statements contained in the document and its proper interpretation are not subject to judicial notice if those matters are reasonably disputable. (StorMedia, Inc. v. Superior Court (1999) 20 Cal.4th 449, 457, fn. 9.) StorMedia stated: “ ‘In ruling on a demurrer, a court may consider facts of which it has taken judicial notice. (Code Civ. Proc., § 430.30, subd. (a).) This includes the existence of a document. When judicial notice is taken of a document, however, the truthfulness and proper interpretation of the document are disputable. [Citation.]’ ” (Fremont Indemnity Co. v. Fremont General Corp. (2007) 148 Cal.App.4th 97, 113.)

“The hearing on demurrer may not be turned into a contested evidentiary hearing through the guise of having the court take judicial notice of documents whose truthfulness or proper interpretation are disputable.” (Id. at p. 114.)

“In short, a court cannot by means of judicial notice convert a demurrer into an incomplete evidentiary hearing in which the demurring party can present documentary evidence and the opposing party is bound by what that evidence appears to show.” (Id. at p. 115.)

“ ‘Courts can take judicial notice of the existence, content and authenticity of public records and other specified documents, but do not take judicial notice of the truth of the factual matters asserted in those documents.’ ” [Citation.]” (Dominguez v. Bonta (2022) 87 Cal.App.5th 389, 400.)

Here, MBT and Garufis are attempting to improperly turn their demurrer into a contested evidentiary hearing. Likewise, plaintiffs’ opposition primarily argues the merits of the case and assert facts that do not appear in the AFAC. What the court is concerned with, as is required when ruling on a demurrer, are the allegations included in the AFAC.

The court will take judicial notice of the February 15, 2024, order submitted in reply to plaintiffs’ opposition. However, the court will not take judicial notice of the other documents as it would be improper to assume the truthfulness of what the documents purport to prove. None of the statements contained therein are reasonably beyond dispute.

2. Standard on Demurrer

“When any ground for objection to a complaint, cross-complaint, or answer appears on the face thereof, or from any matter of which the court is required to or may take judicial notice, the objection on that ground may be taken by a demurrer to the pleading.” (Code Civ. Proc., § 430.30, subd. (a).) “Our consideration of the facts alleged includes ‘those evidentiary facts found in recitals of exhibits attached to [the] complaint.’ [Citation.]” (Alexander v. Exxon Mobil (2013) 219 Cal.App.4th 1236, 1250.)

“[A] court must treat a demurrer as admitting all material facts properly pleaded, it does not, however, assume the truth of contentions, deductions or conclusions of law.” (Travelers Indem. Co. of Connecticut v. Navigators Specialty Ins. Co. (2021) 70 Cal.App.5th 341, 358, citing Aubry v. Tri-City Hospital Dist. (1992) 2 Cal.4th 962, 967.)

“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.)

“The purpose of a general demurrer is to determine the sufficiency of the complaint and the court should only rule on matters disclosed in that pleading. An estoppel by judgment may be made by demurrer only when plaintiff’s complaint discloses the matter relied upon to support the plea, and must otherwise be pleaded affirmatively by the defendant in his answer, and not in a memorandum in support of demurrer.” (Ion Equipment Corp. v. Nelson (1980) 110 Cal.App.3d 868, 881.) MBT and Garufis largely argue “facts” that are not disclosed in the AFAC or in judicially noticed documents. Those additional “facts” constitute a “speaking demurrer” which is improper, and the court will not consider any facts not disclosed in the AFAC.

3. Statute of Limitations

MBT and Garufis argue that all of plaintiffs’ claims against MBT and Garufis are barred by the applicable statutes of limitations. MBT and Garufis argue that the following are the statutes of limitations for each cause of action:

(1) Negligence - Three years from discovery pursuant to Code of Civil Procedure section 338, subdivision (c)(1); (2) Violation of Corporations Code sections 25401, 25504.1, and 25501 - Five years after the act or transaction constituting the violation or the expiration of two years after the discovery by the plaintiff of the facts constituting the violation, whichever shall first expire, pursuant to Corporations Code section 25506; (3) Fraud/Aiding and Abetting Fraud - Three years from discovery pursuant to Code of Civil Procedure section 338, subdivision (d); and (4) Violation of Welfare and Institutions Code section 15610, subdivisions (a)(1) and (2).

Plaintiffs do not dispute that these are the applicable statutes of limitations for their causes of action. Rather, plaintiffs argue: (1) The relation-back doctrine applies; (2) Alternatively, statutory tolling applies; and (3) Alternatively, the delayed discovery doctrine applies.

“The ultimate question for review is whether the complaint showed on its face that the action was barred by a statute of limitations, for only then may a general demurrer be sustained and a judgment of dismissal be entered thereon.” (Moseley v. Abrams (1985) 170 Cal.App.3d 355, 358.)

Relying almost entirely on the documents that the court has declined to take judicial notice of, MBT and Garufis argue that plaintiffs knew, or should have known, about their claims against MBT and Garufis no later than December 2018, “based on publicly available information.” (Demurrer, p. 15, l. 10 - p. 16, l. 22.)

“Traditionally at common law, a cause of action accrues “when [it] is complete with all of its elements”—those elements being wrongdoing, harm, and causation.’ [Citation.] This is the ‘last element’ accrual rule: ordinarily, the statute of limitations runs from ‘the occurrence of the last element essential to the cause of action.’ [Citations.]” (Aryeh v. Canon Business Solutions, Inc. (2013) 55 Cal.4th 1185, 1192.)

“An important exception to the general rule of accrual is the ‘discovery rule . . ..’ ” (Fox v. Ethicon Endo–Surgery, Inc. (2005) 35 Cal.4th 797, 807.) “ ‘A cause of action under this discovery rule accrues when “ ‘plaintiff either (1) actually discovered his injury and its negligent cause or (2) could have discovered injury and cause through the exercise of reasonable diligence.’ ” [Citation.] The limitations period begins once the plaintiff has notice or information of circumstances to put a reasonable person on inquiry. [Citation.] Subjective suspicion is not required. If a person becomes aware of facts which would make a reasonably prudent person suspicious, he or she has a duty to investigate further and is charged with knowledge of matters which would have been revealed by such an investigation. [Citations.]’ ” (McCoy v. Gustafson (2009) 180 Cal.App.4th 56, 108.)

“When a plaintiff reasonably should have discovered facts for purposes of the accrual of a cause of action or application of the delayed discovery rule is generally a question of fact, properly decided as a matter of law only if the evidence . . . can support only one reasonable conclusion.” (Broberg v. Guardian Life Ins. Co. of America (2009)171 Cal.App.4th 912, 921.)

Plaintiffs allegations include: “[F]rom December 21, 2018, Plaintiff Dennis was not only precluded from conducting any discovery in the action, but also from filing any action against potential aiders and abettors, such as MBT. In any event, Plaintiff Dennis through his counsel, Mr. Thomas Foley, only gained access to documents reflecting MBT and Garufis’ close relationship with Mr. Ianelli and the various atypical banking practices alleged in this FAC in or around August 2023 (and did not get the bulk of the documents until September 2023). Prior to then, any public records pertaining to Essex, and which referenced MBT merely reflected that MBT was Essex’s bank, but nothing more. No amount of informal investigation prior to August 2023 would have revealed sufficient facts to plead any type of claim against MBT, especially any claim that requires a showing of actual knowledge.” (AFAC, ¶ 11.)

The above paragraph alone overcomes the statute of limitations argument. Plaintiffs have adequately plead facts showing the time and manner of discovery of the alleged wrongdoing of MBT and Garufis, and the reasons for not discovering the alleged wrongdoing earlier. These allegations are bolstered by numerous other allegations in the lengthy complaint as well as the attachments thereto.

Even if the court had taken judicial notice of the documents submitted by MBT and Garufis, their demurrer based on the statute of limitations would fail. MBT and Garufis essentially request this court to weigh “evidence” contained in the documents. They claim that the allegations in the complaint are contradicted by those documents. Their argument fails. At most, the documents provide evidence that MBT, and Garufis as the president and CEO of MBT, were involved in a banking relationship with Essex and Iannelli. MBT and Garufis point to nothing in the documents that gave plaintiffs knowledge of any wrongdoing on the part of MBT or Garufis, or even provided information that should prompt investigation of MBT and Garufis.

“A demurrer based on a statute of limitations will not lie where the action may be, but is not necessarily, barred. [Citation.] In order for the bar of the statute of limitations to be raised by demurrer, the defect must clearly and affirmatively appear on the face of the complaint; it is not enough that the complaint shows that the action may be barred. [Citation.]” (Marshall v. Gibson, Dunn & Crutcher (1995) 37 Cal.App.4th 1397, 1403)

Here, at the demurrer stage, the AFAC does not clearly and affirmatively show that the causes of action are barred by the applicable statutes of limitations.

Likewise, MBT and Garufis’ argument that the relation-back doctrine is inapplicable is without merit. They seem to argue, incorrectly, that all that is required is that plaintiffs have notice of the name of the defendant. Such is not the law.

“Code of Civil Procedure section 474 is to be liberally construed. [Citation.] “ ‘[T]he relevant inquiry when the plaintiff seeks to substitute a real defendant for one sued fictitiously is what facts the plaintiff actually knew at the time the original complaint was filed.’ ” [Citation.] “ ‘It is when [plaintiff] is actually ignorant of a certain fact, not when [plaintiff] might by the use of reasonable diligence have discovered it. Whether [plaintiff’s] ignorance is from misfortune or negligence, [plaintiff] is alike ignorant, and this is all the statute requires.’ ” [Citation.]” (Fuller v. Tucker (2000 84 Cal.App.4th 1163, 1170.)

“The phrase “ ‘ignorant of the name of a defendant’ ” is broadly interpreted to mean not only ignorant of the defendant’s identity, but also ignorant of the facts giving rise to a cause of action against that defendant. “ ‘[E]ven though the plaintiff knows of the existence of the defendant sued by a fictitious name, and even though the plaintiff knows the defendant’s actual identity (that is, his name) the plaintiff is ‘ “ignorant” ’ within the meaning of the statute if [plaintiff] lacks knowledge of that person’s connection with the case or with [plaintiff’s] injuries. [Citations.] The fact that the plaintiff had the means to obtain knowledge is irrelevant. [Citation.]’ ” [Citation.]” (Ibid.)

The demurrer to the AFAC by MBT and Garufis, based on the applicable statute of limitations, will be overruled.

            Elements of Each Cause of Action

MBT and Garufis next argue that each of plaintiffs’ causes of action fail because each of them fails to state facts sufficient to state a cause of action pursuant to Code of Civil Procedure section 430.10, subdivision (e).

“The rules by which the sufficiency of a complaint is tested against a general demurrer are well settled. We not only treat the demurrer as admitting all material facts properly pleaded, but also “ ‘give the complaint a reasonable interpretation, reading it as a whole and its parts in their context. [Citation.]’ ” [Citation.]” (Quelimane Co. v. Stewart Title Guaranty Co. (1998) 19 Cal.4th 26, 38.)

“If the complaint states a cause of action under any theory, regardless of the title under which the factual basis for relief is stated, that aspect of the complaint is good against a demurrer. “ ‘[W]e are not limited to plaintiffs’ theory of recovery in testing the sufficiency of their complaint against a demurrer, but instead must determine if the factual allegations of the complaint are adequate to state a cause of action under any legal theory. The courts of this state have . . . long since departed from holding a plaintiff strictly to the ‘ “form of action” ’ he has pleaded and instead have adopted the more flexible approach of examining the facts alleged to determine if a demurrer should be sustained.’ ” [Citations.]” (Id. at pp. 38-39.)

First and Second Causes of Action for Negligence:

“To state a cause of action for negligence, a plaintiff must allege (1) the defendant owed the plaintiff a duty of care, (2) the defendant breached that duty, and (3) the breach proximately caused the plaintiff’s damages or injuries.” (Lueras v. BAC Home Loans Servicing, LP (2013) 221 Cal.App.4th 49, 62.)

MBT and Garufis argue that the first cause of action for negligence as to plaintiff Dennis fails because plaintiffs fail to plead the existence of duty owed to Dennis by MBT or Garufis.  (Demurrer, p. 19, ll. 19-20.)

In opposition, plaintiffs do not directly address MBT and Garufis’ argument. Rather, plaintiffs argue the facts of the case rather than the relevant allegations contained in the AFAC.

“To establish that a cause of action has been adequately pled, a plaintiff must demonstrate he or she has alleged ‘facts sufficient to establish every element of that cause of action.’ [Citation.]” (Williams v. Sacramento River Cats Baseball Club, LLC (2019) 40 Cal.App.5th 280, 286.)

A review of the AFAC discloses that plaintiffs failed to plead the element of duty, as it pertains to any claims of Dennis against MBT or Garufis, in the first cause of action. As such, the demurrer will be sustained to the first cause of action as it pertains to Dennis. Leave to amend will be granted.

MBT and Garufis next argue that the first cause of action for negligence as to plaintiffs Bischoff and Heller fails because banks owe only a limited, contractual duty to depositors. (Demurrer, p. 20, ll.10-11.)

The AFAC identifies Bischoff as follows: “Plaintiff Marcia Bischoff invested $50,000.00 in an Essex promissory note on 09/08/2009, and another $50,000.00 on 04/29/2020. Ms. Bischoff had bank accounts at MBT at the time that she made her investments in Essex promissory notes. Plaintiff Bischoff will serve as a class representative for the proposed subclass comprised of individuals who were customers of Defendant MBT at the time they made their investments in Essex.” (AFAC, ¶ 24.)

The AFAC identifies Heller as follows: “Plaintiff Lee Heller made a $200,000 investment in a Essex promissory note. Ms. Heller was a customer who had bank accounts at Defendant MBT at the time she made her investment in Essex. Plaintiff Heller will serve as a class representative for the proposed subclass comprised of individuals who were customers of Defendant MBT at the time they made their investment.” (AFAC, ¶ 25.)

The AFAC further alleges:

“Defendants Garufis and MBT owed a duty to the members of the MBT Subclass which includes investors who were also customers of MBT to do reasonable due diligence in complying with the Know Your Customer standards. Both Defendants MBT and Garufis were negligent in failing to do a reasonable due diligence on Ralph Iannelli which enabled Defendant Iannelli to continue keeping Essex afloat using Essex’s bank accounts at MBT and loans from MBT which Essex was in fact insolvent.” (AFAC, ¶ 128.)

“Defendants Garufis and MBT were negligent in failing to discover that Defendant Iannelli was using loans from Defendant MBT and Essex’s bank accounts at MBT to conduct a fraudulent enterprise between 2012 and 2018 which could not have happened but for Defendants Garufis’ and MBTs’ negligence, which negligence caused damages to members of the all the Subclasses in an amount according to proof at the time of trial.” (AFAC, ¶ 129.)

MBT and Garufis’ argument focuses on the scope of a banks duties and breach of the duty. This is not a proper grounds for demurrer. It is, as alluded to above, a speaking demurrer that does not focus on the facts as alleged in the AFAC, but rather relies on argument and extrinsic documents. While the existence of a duty is a question of law, rather than a question of fact for the trier of fact, the function of a demurrer is not to make that ruling at the pleading stage, unless said absence of duty is clearly disclosed by the pleading.

Plaintiffs have pled all elements necessary to overcome demurrer as to the first cause of action for negligence as it applies to Bischoff and Heller. The demurrer to the first cause of action, as it applies to Bischoff and Heller, will be overruled.

MBT and Garufis next argue that the second cause of action for negligence as to Essex fails because plaintiffs fail to plead the breach of any duty owed to Essex. (Demurrer, p. 21, ll. 7-8.)

As with the arguments relative to the first cause of action as it pertains to Bischoff and Heller, MBT and Garufis engage in a speaking demurrer and improperly argue the merits of their case rather than what is alleged in the AFAC. MBT and Garufis’ arguments are better suited to a motion for summary judgment than a demurrer.

The court has reviewed the complaint in its entirety and determines that the allegations in the second cause of action for negligence as to Essex is sufficient to overcome demurrer. Duty, breach, and causation have all been adequately pled. The demurrer to the second cause of action will be overruled.

Third, Fourth, and Fifth Causes of Action:

MBT and Garufis demur to the third, fourth, and fifth causes of action arguing that plaintiffs fail to plead intent to defraud with specificity. (Demurrer, p. 22, ll. 25-26.)

There is no dispute that intent is an element of the third, fourth, and fifth causes of action.

Plaintiffs argue that their allegations “support inferences of knowledge and intent.” (Opposition, p. 17, l. 17.) However, they do not cite to any portion of the AFAC that specifically alleges intent. Inferences, in this respect are insufficient. As noted above, a plaintiff must demonstrate he or she has alleged facts sufficient to establish every element of that cause of action.

Allegations of “knowledge” and “intent” are allegations of facts, which are sufficiently alleged through use of the term. (See City of Pomona v. Superior Court (2001) 89 Cal.App.4th 793, 803 [“Allegations of the defendant’s knowledge and intent to deceive may use conclusive language.”].)

While plaintiffs may plead intent simply by using the term, they must affirmatively allege that MBT and Garufis acted with intent, in order to state facts sufficient to constitute causes of action for violation of California Security Laws, Fraud and Aiding and Abetting Fraud, and Financial Elder Abuse. As such, the demurrer to the third, fourth, and fifth causes of action will be sustained. Plaintiffs will be given leave to amend.