Operating Engineers Pension Trust v. C and K Engineering

Filed 9/6/07 Operating Engineers Pension Trust v. C and K Engineering CA2/5

NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS

California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

SECOND APPELLATE DISTRICT

DIVISION FIVE

APPEAL from a judgment of the Superior Court of Los Angeles County. Joseph Devanon, Judge. Reversed.

Laquer, Urban, Clifford & Hodge and Susan Graham Lovelace, in pro. per., and for Plaintiffs and Appellants.

Berger Kahn, Mindy Henstridge Baldwin; Littler Mendelson and Wayne A. Hersh for Defendants and Respondents.

_____________________________________

This is an action for intentional, negligent, and reckless misrepresentation and concealment of material facts, breach of a security agreement, and conversion. Plaintiffs and appellants are labor-management multi-employer trusts created pursuant to declarations of trust between the International Union of Operating Engineers, Local Union No. 12, and employer associations in the construction industry in Southern California and Southern Nevada (the Trusts).^[1] Defendants and respondents are various contractors and related individuals who are alleged to be subject to the trust agreements (Defendants).^[2] The Trusts appeal from a judgment of dismissal and award of sanctions, following a judgment on the pleadings in favor of Defendants. The Trusts contend judgment on the pleadings was improperly granted on res judicata grounds. The Trusts also argue their action was not barred by the statute of limitations, or other grounds asserted on appeal by Defendants. The Trusts further contend the trial court abused its discretion in denying leave to amend and imposing sanctions for filing a frivolous action. We hold that judgment on the pleadings was improperly granted and reverse the judgment.

FACTS AND PROCEDURAL BACKGROUND

Allegations of the Complaint

On June 15, 2005, the Trusts filed the instant complaint against Defendants stating seven causes of action. The complaint alleged the following.

Preliminary Allegations

Christiansen was a shareholder and president of Bio/Chem California, Bio/Chem Nevada, and Soil Mixing Systems, Inc. Christiansen was doing business as C and K Engineering Corporation and Bio/Chem Technology. Kasner was a shareholder and vice-president of Bio/Chem California and Bio/Chem Nevada, a shareholder and president of R.K. Equipment Corp. (R.K.), and the general partner of KFLP. Thompson was president of TWT. Christiansen was married to Thompson.

The individual Defendants had set up the business entity Defendants as alter egos of each other to violate the rights of the Trusts. On June 15, 2001, Defendants conspired between themselves to do every act, omission, misrepresentation, concealment of fact, event, or otherwise set forth in the complaint.

The Trusts did not discover the causes of action until on or after August 19, 2002. The Trusts could not with due diligence discover the claims for relief until that date, because the relevant information was not public knowledge, Defendants concealed information, and the Trusts had no access to the information.

On July 12, 1999, the Trusts filed an action in federal court against Bio/Chem California, Bio/Chem Nevada, C and K, Kasner, Soil Mixing, and R.K. to collect fringe benefit contributions due under a collective bargaining agreement and the Employee Retirement Income Security Act of 1974, as amended (29 U.S.C. 1132(e) (ERISA)) (First Federal Action). On December 13, 2000, the Trusts filed a third amended complaint for breach of contract in the First Federal Action.

On or about December 29, 1999, Bio/Chem California, Bio/Chem Nevada, Kasner, and/or Christiansen (hereinafter Productive Finance Debtors) became indebted to Productive Finance, and Productive Finance took a lien on 22 items (the Collateral) of Bio/Chems equipment (Productive Finance Lien) as security. On or about June 30, 2001, the Productive Finance Debtors owed Productive Finance $108,230.79. On August 24, 2001, Productive Finance assigned the debt and its lien to Thompson, Kasner, TWT, and KFLP and/or TWT/KFLP.

Bio/Chem California, Bio/Chem Nevada, and C and K (judgment defendants), and Kasner, Soil Mixing, and R.K. (nonjudgment defendants) entered into a settlement agreement with the Trusts in the First Federal Action. The settlement agreement was fully executed as of January 8, 2002, but was made effective October 1, 2001. The judgment defendants agreed to pay the Trusts $560,000 plus interest, $80,000 of which was to be paid within seven days and the balance in 84 monthly installments. As part of the settlement, the judgment defendants executed a security agreement granting the Trusts a security interest in the Collateral for payment of the settlement amount. The security agreement was incorporated by reference into the settlement agreement. It provided that the Trusts were aware of Productive Finances preexisting lien, and that the Trusts security interest in the Collateral would not be junior to any lien but Productive Finances lien. The security agreement gave the judgment defendants the right to sell or remove an item of the Collateral as long as the item was replaced with an item of greater or equal value and advance approval by the Trusts was obtained.

Pursuant to the settlement agreement, the judgment defendants and the Trusts executed a stipulation for entry of judgment and judgment in the amount of $560,000 plus interest. The judgment was to be filed only in the event the judgment defendants failed to satisfy the conditions of the settlement agreement. There also was a stipulation for dismissal of the action without prejudice providing for the United States District Court (district court) to retain jurisdiction to enforce the terms of the settlement agreement and stipulated judgment.

As Christiansen and Bio/Chem were delinquent in paying Bio/Chems debt, Kasner, Thompson, TWT, KFLP and/or TWT/KFLP repossessed items of the Collateral on December 14, 2001. On March 11, 2002, Bio/Chem voluntarily released approximately ten items of the Collateral to Thompson, Kasner, TWT, KFLP and/or TWT/KFLP without notice to the Trusts.

Due to the breach of the settlement agreement, judgment in the First Federal Action was entered in favor of the Trusts and against Bio/Chem California, Bio/Chem Nevada, and C and K on or about May 23, 2002.

On or about August 16, 2002, pursuant to an alleged public sale, TWT and KFLP and/or TWT/KFLP claimed title to each of the ten items of the Collateral.

Causes of Action

The first five causes of action were against Bio/Chem California, Bio/Chem Nevada, C and K, and Christiansen.

The first cause of action was for intentional misrepresentation. The Trusts alleged that the judgment defendants representations in the security agreement that there were no other liens on the Collateral other than the Productive Finance Lien, and no liens senior to the Trusts lien except the preexisting lien of Productive Finance were false, the judgment defendants knew the representations were false when they made them and the judgment defendants made the false representations with the intent to deceive the Trusts and induce the Trusts to act in reliance. The Trusts did not know the judgment defendants representations were false at the time the Trusts entered into the settlement agreement and security agreement.

In the second cause of action, for negligent and reckless misrepresentation, the Trusts alleged the representations were made recklessly and with intent to induce the Trusts to act in reliance.

In the third cause of action was for fraudulent concealment of material fact; the fourth cause of action was for negligent and reckless concealment of material fact. The Trusts alleged the judgment defendants and Christiansen concealed the material facts relating to the assignment of Productive Finances security interest in the Collateral to TWT and KFLP and/or TWT/KFLP, the threat by Kasner, Thompson, TWT and KFLP and/or TWT/KFLP to repossess one or more items of the Collateral, and the fact that Kasner, Thompson, TWT and KFLP and/or TWT/KFLP were a related party to one or more of the judgment defendants under the security agreement. The Trusts were ignorant of these facts at the time they entered into the settlement agreement and security agreement.

In the fifth cause of action, for breach of security agreement, the Trusts alleged that, within the past four years, the judgment defendants and Christiansen breached the security agreement by failing to grant the Trusts a security interest that was not subordinate to any other lien except Productive Finances preexisting lien and was free from any liens other than the Productive Finance lien, as promised pursuant to the security agreement. On December 12, 2002, the Trusts requested that the judgment defendants comply with the above provisions of the security agreement, and the judgment defendants failed to comply.

The sixth and seventh causes of action were against defendants Kasner, Thompson, TWT, KFLP, and TWT/KFLP.

The sixth cause of action, to set aside fraudulent transfer, alleged that pursuant to the settlement agreement, judgment was rendered in the First Federal Action against the judgment defendants for $560,000, which became final June 22, 2002. $80,000 has been satisfied and the unpaid principal due was $480,000. On or about March 11, 2002, the judgment defendants fraudulently transferred one or more items of the Collateral to TWT, KFLP, and/or TWT/KFLP or undertook a scheme to make it appear there was such transfer, with intent to defraud the Trustees. The fraudulent transfer was in violation of the California Uniform Commercial Code (UCC) for failure to give proper notice of the alleged repossession and public sale and failure to conduct the sale in a commercially reasonable manner. The transfer was done with intent to hinder the collection of the Trustees claim and the claims of other creditors.

In the seventh cause of action, for conversion, the Trusts alleged that, with knowledge that the Trusts had a security interest in the Collateral, TWT, KFLP. TWT/KFLP, Thompson, and Kasner, on or about March 11, 2002, without notice to the Trusts, transferred part of the Collateral between themselves and, on or about August 15, 2002, without notice to the Trusts, engaged in an alleged public sale, which did not comply with the UCC. On May 16, 2003, the Trusts demanded that TWT, KFLP. TWT/KFLP, Thompson, and Kasner make the property available for the Trusts repossession under the UCC, but TWT, KFLP. TWT/KFLP, Thompson, and Kasner refused to comply.

The Trusts sought compensatory and punitive damages, reasonable attorneys fees, an order setting aside the transfer from the judgment defendants to TWT, KFLP, and TWT/KFLP, an order attaching the property, an order restraining TWT, KFLP, and TWT/KFLP, Thompson, and Kasner from disposing of the property, an order declaring the judgment in the First Federal Action a lien on the property transferred, an order declaring that TWT, KFLP, and TWT/KFLP, Thompson, and Kasner hold the collateral in trust for the Trusts, an accounting, the value of the property converted and consequential losses.

Answer To The Complaint

Defendants generally denied the allegations of the complaint and asserted affirmative defenses including res judicata, based on the judgment in the First Federal Action, and the statute of limitations.

Motion for Judgment on the Pleadings

On January 18, 2005, Defendants filed a motion for judgment on the pleadings pursuant to Code of Civil Procedure section 438, subdivision (c)(1)(b)(i) on the ground the court had no jurisdiction of the subject of the complaint because the action was barred by res judicata. In the memorandum of points and authorities, Defendants contended the judgment in the First Federal Action barred this action under the doctrine of res judicata and the action was also barred by the statute of limitations.

Defendants requested the trial court take judicial notice of the following documents. Regarding the First Federal Action, Defendants requested judicial notice of the third amended complaint, filed December 13, 2000; stipulation for dismissal of party Defendants with prejudice, filed February 1, 2002; stipulation for dismissal without prejudice, filed February 1, 2002; stipulation for entry of judgment, filed May 23, 2002; and judgment, filed May 23, 2002. Defendants also requested judicial notice of the complaint, filed October 14, 2003, and order dismissing action for lack of jurisdiction, filed January 14, 2004, in a second federal action brought by the Trustees (Second Federal Action).

The Third Amended Complaint in the First Federal Action

The third amended complaint for breach of contract alleged the district court had jurisdiction of the suit under section 185(a) of title 29 of the United States Code (Labor-Management Relations Act of 1947 as amended) and ERISA. Plaintiffs were the Trusts. Defendants were Bio/Chem Technology, C and K, Kasner (individually and doing business as R. K. Equipment Company), R.K., and Soil Mixing. At all relevant times, Bio/Chem Technology and R.K. Company^[3]were obligated to the terms and provisions of the Master Labor Agreement (Master Agreement) between Local 12 and Southern California General Contractors Association. By the Master Agreement and Trust Agreements, Bio/Chem Technology and R. K. Company were obligated to pay fringe benefit contributions to the Trusts on a monthly basis and permit the Trusts to conduct audits of their payroll records to determine if fringe benefit contributions were properly paid. Bio/Chem Technology failed to pay fringe benefit contributions or permit audits.

In the second cause of action of the third amended complaint for breach of contract, it was alleged that Soil Mixing, C and K, and R.K. were set up by the principals of Bio/Chem Technology and R.K. Company to make them appear to be new and different companies, but they were really only a cosmetic change in the operations of Bio/Chem Technology and R.K. Company to avoid the obligations to Local 12 and the Trusts to pay fringe benefits. Bio/Chem Technology, Soil Mixing, C and K, R.K. Company, and R.K. have had common ownership, common management, centralized control of labor relations, and an interrelation of operations so that they are alter egos of each other, and operated to avoid the obligations to the Trusts to pay fringe benefits. Bio/Chem Technology, Soil Mixing, C and K, R.K. Company, and R.K. failed to pay fringe benefits and permit audits as required by The Master Agreement and Trust Agreements.

In the third cause of action for breach of contract, the Trusts alleged that Bio/Chem Technology, Soil Mixing, C and K, R.K. Company, and R.K. were jointly and severally liable for all unpaid fringe benefit contributions, contract damages, audit costs, liquidated damages, attorneys fees, and interest owed to the Trusts, because the principals of Soil Mixing, C and K, R.K. Company, and R.K. exercised such dominion and control over Bio/Chem Technology that the separate identity of Bio/Chem Technology ceased to exist and Bio/Chem Technology owned the business of Soil Mixing, C and K, R.K. Company, and R.K.

In the fourth cause of action for breach of contractaffirmative relief, the Trusts alleged that Bio/Chem Technology, Soil Mixing, C and K, R.K. Company, and R.K. failed to provide a good faith deposit or performance bond as required by the Trust Agreements for failure to pay contributions in a timely manner for three or more months within any 12-month period.

The Trusts sought judgment against the First Federal Action defendants for: unpaid fringe benefit contributions; damages for breach of contract; liquidated damages; interest on all fringe benefit contributions and/or damages from due dates; reasonable attorneys fees; costs of suit; and a good faith deposit or performance bond.

Stipulations in Connection with Resolution of the First Federal Action

On February 1, 2002, the district court ordered a stipulated dismissal with prejudice of Kasner individually and doing business as R.K. Equipment Company, R.K., and Soil Mixing. On the same date, the district court ordered a stipulated dismissal without prejudice of the judgment defendants, provided that the parties executed a settlement agreement fully and finally settling the First Federal Action. The order provided the district court retained jurisdiction to enforce the terms of the settlement agreement and over Bio/Chem California, Bio/Chem Nevada, and C and K.

The stipulation for entry of judgment, executed in November and December 2001, recited that the stipulation was entered into in order to settle and conclude the above-referenced litigation between the parties relating to the payment of fringe benefit contributions and damages to plaintiffs by defendants. On May 23, 2002, pursuant to such stipulation, the district court entered judgment in favor of the Trusts and against the judgment defendants jointly and severally for the principal amount of $560,000 plus interest from October 1, 2001, with a credit given for any amounts paid pursuant to the settlement agreement.

Complaint Filed October 14, 2003 (Second Federal Action)

On October 14, 2003, the Trusts filed a complaint against Bio/Chem Technology, C and K, Kasner, R.K., Soil Mixing, Christiansen, TWT, Thompson, and KFLP. The complaint alleged the district court had jurisdiction over the action pursuant to its stipulated dismissal order of February 1, 2002, in the First Federal Action. The complaint alleged 16 causes of action for fraud and misrepresentation, specific performance of the security agreement, interference with the security agreement, conversion, waste, constructive trust, and conspiracy. The Trustees alleged that, as of October 14, 2003, the judgment defendants owed the Trusts $480,000.

Order Dismissing Second Federal Action on January 14, 2004

Soil Mixing filed a motion to remand the Second Federal Action to state court. As the action had not been removed from state court, the district court construed Soil Mixings motion as a motion to dismiss for lack of jurisdiction. Soil Mixing contended the complaint did not state grounds for the district courts subject matter jurisdiction. The Trusts responded the district court had subject matter jurisdiction of the action, because the district court retained jurisdiction to enforce the settlement agreement in the First Federal Action and the Trusts were seeking to enforce the settlement agreement through the cause of action for performance of the security agreement. The district court ruled that the Trusts had already obtained relief in the district court for breach of the settlement agreement by filing the previously-signed stipulated judgment on May 23, 2002. The district court had no jurisdiction of the subject matter of the action except retained jurisdiction, if any, to enforce the settlement agreement. Since the Trusts had already enforced the settlement agreement by having the district court enter judgment, the district court no longer had retained jurisdiction.^[4] Accordingly, the district court dismissed the case for lack of subject matter jurisdiction. In a footnote, the district court stated it took no position on whether the Trusts could raise claims to enforce the judgment or enforce the security agreement as a separate contract.

Defendants Motion for Sanctions

On January 18, 2006, Defendants filed a motion for sanctions pursuant to Code of Civil Procedure section 128.7 in the amount of $12,332.10 on the ground that the Trusts and their attorney deliberately filed a complaint which contains claims that are frivolous because precluded by a previously-obtained judgment. The memorandum of points and authorities also asserted the complaint was barred by ERISA and the doctrine of intrinsic fraud, and improperly sought to circumvent the Trusts exclusive remedy under federal Rules of Civil Procedure, rule 60(b).

Opposition To Motion for Judgment on the Pleadings and To Motion for Sanctions

On January 26, 2006, the Trusts asked the trial court to take judicial notice of the following documents in opposition to the motions for judgment on the pleadings and sanctions: the docket and minutes in the First Federal Action and certificates from California Secretary of State and Nevada Secretary of State regarding suspension of corporate status of the judgment defendants. The docket indicates the district court had federal question jurisdiction (ERISA). The minutes of September 27, 2001, indicate that the parties settled the First Federal Action in a settlement conference held September 24, 2001.

The Trusts opposed the motion for judgment on the pleadings on the ground that res judicata did not bar the Trusts claims as the present action involved claims that did not arise until after the First Federal Action was filed and different parties are defendants in both suits. Furthermore, the action was not barred by the statute of limitations, because the complaint alleges the action was filed within three years of the discovery of Defendants fraudulent conduct (Code Civ. Proc., 338, subd. (d)), and rule 60(b) of the Federal Rules of Civil Procedure (28 U.S.C.), does not apply. The instant complaint alleges the Trusts learned no earlier than August 19, 2002, that the judgment defendants misrepresented and/or concealed material facts constituting the breach of the security agreement. This new wrongful conduct occurred long after the First Federal Action was filed. The Trusts brought the Second Federal Action to address this new wrongful conduct. The Second Federal Action was dismissed not on the merits of the Trusts claims but because of lack of subject matter jurisdiction, in that the parties were not diverse and there was no independent basis for jurisdiction, such as ERISA. The Second Federal Action was not litigated. This action includes none of the causes of action set forth in the First Federal Action and makes no claims for any actions occurring prior to the time the First Federal Action was filed.

The Trusts also opposed the motion for sanctions on the grounds that the Trusts claims are not barred on any ground raised by Defendants.

Ruling on Motions for Judgment on the Pleadings and Sanctions

On February 9, 2006, the motion for judgment on the pleading was granted and all causes of action were dismissed with prejudice and without leave to amend. The trial court ruled the action was barred by the res judicata effect of the First Federal Action and Second Federal Action. The motion for sanctions was granted against the Trusts and their law firm in the amount of $5,000. This timely appeal followed.

DISCUSSION

Judgment on the Pleadings Was Erroneously Granted

The Trusts contend the action is not barred by the res judicata effect of the First Federal Action or by the statute of limitations. Defendants disagree. We conclude that neither res judicata nor the statute of limitations requires granting judgment on the pleadings.

Standard of Review

The motion for judgment on the pleadings performs the function of a general demurrer. . . . The standard of appellate review of a judgment on the pleadings is, therefore, identical to that on a judgment following the sustaining of a demurrer. (Baillargeon v. Department of Water & Power [(1977)] 69 Cal.App.3d [670,] 675.) (Barker v. Hull (1987) 191 Cal.App.3d 221, 224.)

In reviewing the sufficiency of a complaint against a general demurrer, we are guided by long-settled rules. We treat the demurrer as admitting all material facts properly pleaded, but not contentions, deductions or conclusions of fact or law. [Citation.] We also consider matters which may be judicially noticed. [Citation.] Further, we give the complaint a reasonable interpretation, reading it as a whole and its parts in their context. [Citation.] When a demurrer is sustained, we determine whether the complaint states facts sufficient to constitute a cause of action. [Citation.] (Blumhorst v. Jewish Family Services of Los Angeles (2005) 126 Cal.App.4th 993, 999.)

[A]ny particular count which is well pleaded will not be affected by defects in a separate cause of action, so long as inconsistent or antagonistic facts are not pled. [Citation.] The complaint must be liberally construed and survives a general demurrer insofar as it states, however inartfully, facts disclosing some right to relief. (Longshore v. County of Venture (1979) 25 Cal.3d 14, 21-22.)

Where written documents are the foundation of an action and are attached to the complaint and incorporated therein by reference, they become a part of the complaint and may be considered on demurrer. (City of Pomona v. Superior Court (2001) 89 Cal.App.4th 793, 800.)

Res Judicata

Res judicata describes the preclusive effect of a final judgment on the merits. Res judicata, or claim preclusion, prevents relitigation of the same cause of action in a second suit between the same parties or parties in privity with them. Collateral estoppel, or issue preclusion, precludes relitigation of issues argued and decided in prior proceedings. [Citation.] Under the doctrine of res judicata, if a plaintiff prevails in an action, the cause is merged into the judgment and may not be asserted in a subsequent lawsuit; a judgment for the defendant serves as a bar to further litigation of the same cause of action. [] A clear and predictable res judicata doctrine promotes judicial economy. Under this doctrine, all claims based on the same cause of action must be decided in a single suit; if not brought initially, they may not be raised at a later date. Res judicata precludes piecemeal litigation by splitting a single cause of action or relitigation of the same cause of action on a different legal theory or for different relief. [Citation.] (Mycogen Corp. v. Monsanto Co. (2002) 28 Cal.4th 888, 896-897.)

Res judicata serves as a bar to all causes of action that were litigated or that could have been litigated in the first action. . . . This determination is made as of the date the first complaint is filed. The scope of litigation is framed by the complaint at the time it is filed. [Citation.] [] Res judicata is not a bar to claims that arise after the initial complaint is filed. These rights may be asserted in a supplemental pleading, but if such a pleading is not filed a plaintiff is not foreclosed from asserting the rights in a subsequent action. . . . The general rule that a judgment is conclusive as to matters that could have been litigated does not apply to new rights acquired pending the action which might have been, but which were not, required to be litigated [citations]. [Citation.] [] . . . There is no requirement to amend a complaint to add newly acquired claims. [Citation.] Using the date of filing of the original complaint as the cut-off for determining what claims could have been brought results in a workable rule; otherwise, courts would get bogged down in determining whether an amendment was possible or practicable when the new claims arose. . . . [] We discern no principled basis for distinguishing between a new fact and a newly discovered fact . . . .[^[5]] The reason for the rule that all claims that could have been brought are barred under res judicata is so [a] party cannot by negligence or design withhold issues and litigate them in consecutive actions. [Citation.] Where the plaintiff is unaware of the facts giving rise to a claim due to defendants fraud, there is no question of successive litigation by design; the only concern is negligence. . . . [W]here it cannot be said that plaintiff knew or should have known of the claim when the first action was filed, res judicata should not bar the second action. (Allied Fire Protection v. Diede Construction (2005) 127 Cal.App.4th 150, 155-156.)

A final judgment is res judicata only if it was rendered on the merits. This requirement is derived from the fundamental policy of the doctrine, which gives stability to judgments after the parties have had a fair opportunity to litigate their claims and defenses. (7 Witkin, Cal. Procedure (4th ed. 1997) Judgment, 313, p. 864.)

The judgment in the First Federal Action should not have been afforded res judicata effect in this action by the trial court. The First Federal Action was a suit for breach of a collective bargaining agreement and ERISA to conduct audits and collect past-due fringe benefits. This action involves different causes of action: fraud, tort, and conversion claims relating to concealing and reducing the value of the security the Trusts bargained for and breach of the security agreement entered into to secure payment of the judgment. These causes of action are not based on the claim for breach of the collective bargaining agreement. The instant causes of action all arose after the First Federal Action was filed. Different rights are involved. The First Federal Action involved Defendants obligation to pay fringe benefit contributions to the Trusts. This action involves the Trusts right to be free from tortious behavior that reduced the value of the judgment and prevented collection of the judgment. (See Brenelli Amedeo, S.P.A. v. Bakara Furniture, Inc. (1994) 29 Cal.App.4th 1828, 1836-1838 [res judicata does not apply where the prior action was for breach of contract and the second action sought protection from tortious behavior that was preventing collection of the judgment won in the prior action].) There is no problem of claim-splitting or piecemeal litigation here, as the causes of action of the instant action could not have been brought when the First Federal Action was filed on July 12, 1999. Moreover, Christiansen, TWT, Thompson, KFLP, and TWT/KFLP, defendants in the instant case, were not defendants in the First Federal Action.

Defendants contentions are simply without merit. The instant claims did not merge into the judgment in the First Federal Action, because they arose after the First Federal Action was commenced. (Allied Fire Protection v. Diede Construction, supra, 127 Cal.App.4th at p. 155.) The First Federal Action and the instant lawsuit do not involve the same primary right, which Defendants identify as the right to collect unpaid fringe benefits. A primary right is a plaintiffs right to be free from a particular injury. (Mycogen Corp. v. Monstanto Co., supra, 28 Cal.4th at p. 904, citing Crowley v. Katleman (1994) 8 Cal.4th 666, 681-682.) The primary right in the First Federal Action was the Trusts entitlement to $560,000 in unpaid fringe benefits; the primary right in the instant case is the Trusts right to be free from fraudulent impairment of a security agreement.

To the extent the trial court decided that this action is barred by the res judicata effect of the ruling dismissing the Second Federal Action, we hold the trial court erred. Only a judgment on the merits may have res judicata effect. Even if the Second Federal Action and this action contain some similar causes of action, the order dismissing the Second Federal Action for lack of subject matter jurisdiction did not decide the merits of the causes of action and thus is not entitled to res judicata effect.

Statute of Limitations

Defendants contend the three-year statute of limitations applicable to fraud claims^[6]bars this action, because a UCC financing statement amendment was filed on September 6, 2001, reflecting that the lien on the Collateral had been transferred from Productive Finance to TWT and KFLP.^[7] Defendants contend this amendment put the Trusts on notice more than three years before the filing of this lawsuit (June 15, 2005) that another party might have a lien on the collateral. The Trusts contend the complaint is not time-barred, as the complaint alleges that the Trusts did not discover each cause of action until on or after August 19, 2002.

The fraud alleged in the complaint occurred more than three years prior to June 15, 2005. A plaintiff must affirmatively excuse his failure to discover the fraud within three years after it took place, by establishing facts showing that he was not negligent in failing to make the discovery sooner and that he had no actual or presumptive knowledge of facts sufficient to put him on inquiry. . . . [] . . . It is not in every case, however, that a person is barred after three years by failure to pursue an available means of discovering possible fraud. The statute commences to run only after one has knowledge of facts sufficient to make a reasonably prudent person suspicious of fraud, thus putting him on inquiry.

(Hobert v. Hobart Estate Co. (1945) 26 Cal.2d 412, 437; Schaefer v. Berinstein (1956) 140 Cal.App.2d 278, 295 [In the absence of a duty to make inquiry, . . . the statute does not run merely because the means of discovery were available, and plaintiff is not compelled to disprove that such means existed.].) The fact that the status of a lien is a matter of public record does not charge the plaintiff with constructive notice. (Schaefer v. Berinstein, supra, 140 Cal.App.2d at p. 296.) Where fraud is involved public records are not constructive notice of the true facts to the defrauded party. The purpose of the recording acts is to afford protection not to those who make fraudulent misrepresentations but to bona fide purchasers for value. (Ibid.)

The Trusts plead sufficient facts to establish that the causes of action for fraud were not time-barred. Fraud is alleged in the first four causes of action and fraudulent transfer is alleged in the sixth cause of action. The Trusts alleged the judgment defendants made fraudulent representations and concealments of material facts about liens on the Collateral, fraudulently assigned Productive Finances lien, and fraudulently transferred items of the Collateral prior to June 15, 2002. The Trusts did not discover the true facts until August 19, 2002. There is no indication the Trusts had knowledge of the assignment of Productive Finances lien and transfer of items of the Collateral to TWT and KFLP prior to August 19, 2002. There was no showing the Trusts had knowledge of any facts that would make them suspicious and create a duty to investigate. (Compare Vertex Investment Co. v. Schwabacher (1943) 57 Cal.App.2d 406, 410-421 [the facts that there was no concealment and the plaintiff knew of the decedents comingling of funds over a 24-year period put the plaintiff on inquiry notice of the decedents fraud].) The existence of a UCC filing statement did not charge the Trusts with knowledge or create a duty to investigate. Given that Defendants told the Trusts during the summer and fall of 2001 that Productive Finance had the only lien on the Collateral, the settlement agreement contained that representation, and the UCC filing reflecting the lien assignment by Productive Finance was not filed until two weeks before the parties reached a settlement, we cannot conclude as a matter of law that the Trusts are charged with notice of the lien assignment. Moreover, even if the facts in this record were susceptible to opposing inferences, whether a party had notice of circumstances sufficient to put a prudent man upon inquiry as to a particular fact, and whether by prosecuting such inquiry he might have learned such fact, are questions of fact. (Schaefer v. Berinstein, supra, 140 Cal.App.2d at pp. 296-297.)

The Statute of Limitations in Rule 60(b) of the Federal Rule of Civil Procedure Does Not Apply

Characterizing this suit as an action for breach of the security agreement and fraud associated with the breach, Defendants contend the action is barred by rule 60(b) of the Federal Rules of Civil Procedure because it was filed more than one year after the judgment. Rule 60(b) of the Federal Rules of Civil Procedure provides that a motion for relief from a final judgment on the ground of fraud must be brought within one year after the judgment. We agree with the Trusts that because the instant complaint does not seek to set aside the judgment in the First Federal Action, this statute of limitations does not apply.

Other Contentions

Defendants also contend the lawsuit is barred by ERISA and the doctrine of intrinsic fraud. As the Trusts point out, Defendants did not raise these issues in the motion for judgment on the pleadings. We need not review them in the appeal. (See Leeper v. Beltrami (1959) 53 Cal.2d 195, 203 [grounds for demurrer are waived if not raised below].)

In any event, the contentions have no merit. As this action does not allege a violation of ERISA or an ERISA plan, it does not arise under ERISA and any effect ERISA has to preempt state tort and contract claims do not apply. (See Peacock v. Thomas (1996) 516 U.S. 349, 353.)

[F]raud is intrinsic and not a valid ground for setting aside a judgment when the party has been given notice of the action and has had an opportunity to present his case and to protect himself from any mistake or fraud of his adversary but has unreasonably neglected to do so. (City of Cartagena (1995) 35 Cal.App.4th 1061, 1067.) A judgment may not be set aside on the ground of intrinsic fraud. (Ibid.) This action does not seek to set aside any judgment and thus is not barred by the doctrine of extrinsic fraud.

Sanctions

As judgment on the pleadings was erroneously granted, it follows that the sanctions order must also be reversed.

DISPOSITION

The judgment is reversed. Costs on appeal are awarded to plaintiffs and appellants.

KRIEGLER, J.

We concur:

ARMSTRONG, Acting P. J. MOSK, J.

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^[1] Specifically, appellants are Trustees of the Operating Engineers Pension Trust, Trustees of the Operating Engineers Health and Welfare Fund, Trustees of the Operating Engineers Vacation-Holiday Savings Trust, Trustees of the Operating Engineers Training Trust, and their counsel, Laquer, Urban, Clifford & Hodge, LLP.

^[2] Defendants and respondents are C and K Engineering Corporation (C and K), Nels Christiansen (Christiansen), Thompson Water Trucks, Inc. (TWT), Ellen Thompson (Thompson), Kasner Family Limited Partnership (KFLP), TWT/KFLP, Robert Kasner (Kasner), Bio/Chem Technology, Inc., a California corporation (Bio/Chem California), and Bio/Chem Technology, Inc., a Nevada corporation (Bio/Chem Nevada).

^[3] The third amended complaint also alleged the following concerning the ownership, operation, and control of Bio/Chem Technology and R.K. Company. Bio/Chem California and Bio/Chem Nevada operated as one entity known as Bio/Chem Technology, Inc., under the control of Christiansen and Kasner. R. K. Equipment Company (R.K. Company) and R.K. operated as a single entity under the control of Kasner. C and K voluntarily assumed all the assets and liabilities of Bio/Chem Technology in 1997. Soil Mixing was formed in March 1, 2000, and is a successor-in-interest to the assets and liabilities of Bio/Chem California and Bio/Chem Nevada.

^[4] The district court stated: The settlement agreement provided that upon failure of certain defendants to satisfy the specific obligations of the settlement agreement, the plaintiffs could file with the Court a previously signed stipulation of judgment against the defendants for $560,000 plus interest. . . . These events did occur: the [judgment] defendants failed to make timely payments, and [the Trusts] filed the stipulated judgment with the Court. . . . [] In filing the stipulated judgment with the Court, [the Trusts] elected their remedy for the [judgment] defendants breach of the settlement agreement. The Court rendered a judgment in the [Trusts] favor. Upon the judgment for [the Trusts], the settlement agreement was merged into the judgment. Thus, while [the Trusts] may have a cause of action to enforce the security agreement as a separate contract, [the Trusts] no longer have a cause of action to enforce the settlement agreement. [] The parties agree that the plaintiffs are seeking enforcement of the settlement agreement. However, this ground for jurisdiction must fail because the settlement agreement has merged with the judgment and [the Trusts] are thus barred from seeking further enforcement of the settlement agreement. Thus, the Court does not have jurisdiction over the enforcement claim, and does not have supplemental jurisdiction over the state law claims.

^[5] This refers to a fact giving rise to the fraud claim that occurred before the action was filed but was not discovered until after the action was filed. (Allied Fire Protection v. Diede Construction, Inc. (2005) 127 Cal.App.4th 150, 156.)

^[6] The statute of limitations for an action based on fraud or mistake is three years. The cause of action for fraud does not accrue until the aggrieved partys discovery of the facts constituting the fraud or mistake. (Code Civ. Proc., 338, subds. (d).)

^[7] The Collateral was the subject of UCC statement No. 760685 filed on December 29, 1999, which listed Bio/Chem Technology, Kasner, and Christiansen as the debtors and Productive Finance as the secured party. On September 6, 2001, a UCC Financing Statement Amendment regarding statement No. 760685 was filed reflecting an assignment by Productive Finance to TWT and KFLP, but did not identify what was being assigned. On January 10, 2002, the Trusts filed a UCC statement regarding the Collateral reflecting the Trusts were a secured party.