OMNEL v. Tanner

 

 

 

 

 

 

 

 

 

 

 

Filed 7/3/13  OMNEL v. Tanner CA3

 

 

 

 

 

 

 

 

NOT TO BE PUBLISHED

 

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opinion has not been certified for publication or ordered published for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.

 

 

 

COPY

IN THE COURT OF
APPEAL OF THE STATE OF CALIFORNIA

THIRD APPELLATE
DISTRICT

(Placer)

----

 

 
>

OMNEL,                           Plaintiff and Appellant,               v.   JOHN TANNER,                           Defendant and Respondent.

C070907   (Super. Ct. No. SCV0028456)

 

 

     Plaintiff OMNEL, a California
corporation, appeals from a judgment of
dismissal following an order sustaining defendant John Tanner’s demurrer to
the negligence claim in OMNEL’s first amended complaint (the amended complaint)
against him without leave to amend.  This
case involves a dispute between OMNEL and Tanner’s two companies, defendants
Valpo-LLC and Tanner Industries, over a commercial lease agreement.  OMNEL also sued Tanner personally.  Tanner demurred to the negligence claim
against him, contending that the amended complaint failed to state a cause of
action because Tanner did not owe OMNEL a duty of care. 

            On appeal,
OMNEL contends the trial court erred in sustaining Tanner’s demurrer to
the amended complaint without leave to amend, arguing that corporate officers
such as Tanner are personally liable for tortious
conduct when they personally direct or participate in the conduct that
causes economic harm to third parties. 
Tanner responds that OMNEL failed to allege any duty owed by him to
OMNEL and that corporate officers are not personally liable for negligence when
they make decisions in the course and scope of their duties to the corporation
that incidentally cause economic harm to a third party but do not cause href="http://www.fearnotlaw.com/">physical harm or property damage. 

            Thus, the central
issue in this case is whether a corporate officer may be held liable for
negligent acts performed in the course and scope of his duties to the
corporation when those acts cause only economic harm, as opposed to physical
harm or property damage.  We conclude
that the trial court properly sustained the demurrer because the decisions
Tanner made in the course and scope of his duties to Valpo-LLC and Tanner
Industries caused only incidental economic harm to OMNEL, and such decisions
are protected by limited liability for corporate officers.  We therefore affirm the judgment.

>FACTUAL AND PROCEDURAL BACKGROUND

>Facts Alleged in the Amended Complaint

            OMNEL filed
a complaint against Valpo-LLC, Tanner Industries, and Tanner, which was amended
after Tanner’s first demurrer was sustained with leave to amend.  In the amended complaint, OMNEL alleges the
following:

            Tanner both
owned and was involved in the management and operation of Valpo-LLC and Tanner
Industries.  Tanner is the chief
executive officer, president, and responsible managing officer of Tanner
Industries, a California
corporation. 

            On April 10, 2009, OMNEL entered
into a lease agreement to lease certain commercial space from Valpo-LLC.  OMNEL prepaid $57,360 in rent and deposits,href="#_ftn1" name="_ftnref1" title="">[1]
and the lease required Valpo-LLC to make certain improvements to the
leased premises.

            In April or
May 2009, Valpo-LLC purportedly contracted with Tanner Industries to construct
the required improvements specified in the lease.  The parties agreed that “[t]ime is of the essence.”  Tanner assured OMNEL that construction would
be completed by July 31, 2009.  Rent payments were to begin on August 1, 2009. 

            The lease
required that Valpo-LLC complete the improvements “in compliance with all
applicable building codes and zoning laws.” 
However, “[a]t the direction of Tanner and under his direct supervision,
Tanner Industries and Valpo-LLC began construction of the improvements, but
failed to first apply for the requisite building permits.  [¶]  When OMNEL inquired about the need
for permits for the improvements, Tanner falsely advised OMNEL that no permits
were required.” 

            Under
Tanner’s supervision, Tanner Industries continued construction without building
permits, the construction “was not completed to code, and short-cuts [>sic] were taken to save money such that
the work was not performed in a good and workman like [sic] manner.” 

            Around
January 2010, OMNEL applied for sign permits with the City of Roseville (the
City) and was informed that “building permits were indeed required”
for the improvements.  Accordingly,
the City would not issue a certificate of occupancy until Tanner Industries had
obtained the required permits and the construction had passed inspection.  When OMNEL raised these issues with Tanner,
“Tanner responded that he had friends with the City and that he would work it
out.” 

            About two
months later, on March 2, 2010,
Tanner applied with the City for a building permit.  However, Tanner Industries and Valpo-LLC
“failed to disclose to the City that a mezzanine had been installed.”  During this time, “. . . OMNEL
repeatedly inquired about the status and complained to Tanner about Valpo-LLC’s
failure to properly complete the build-out so that OMNEL could commence
operation of its business.” 

            In late
April 2010, OMNEL began to believe that “the construction process
was in such disarray that the promised build-out was not going to be
. . . completed in conformity with the applicable laws and
regulations in the near future.” 
Accordingly, on April 23,
2010, OMNEL advised Tanner that it would cancel the lease if the
work was not properly completed within 10 days.  On behalf of Valpo-LLC, Tanner orally assured
OMNEL that the construction would be completed no later than June 1, 2010, and that rent would
not commence until a certificate of occupancy issued.  These assurances were documented in an April 23, 2010 amendment to the
lease. 

            The
improvements were not completed in conformity with the applicable
laws by June 1, 2010.  OMNEL “demanded that Valpo-LLC provide reasonable
written assurances that the build-out would be completed within
10 days.”  The City inspectors had
advised Tanner that construction had been done without appropriate inspections,
and “certain portions would need to be redone or removed for inspection;
. . . fire sprinklers would need to be installed, and
. . . there remained numerous other problems with the build-out,
including the lack of a permit for the mezzanine.”  Despite this, Tanner assured OMNEL that
it would be able to occupy the premises within two weeks. 

            When the
construction was still not completed “in conformity with the applicable laws by
July 2010,” OMNEL again inquired about when it would be able to occupy the
premises.  On July 22, 2010, Tanner called OMNEL and
requested a letter from OMNEL canceling the lease.  OMNEL agreed to the request to cancel the
lease, provided that Valpo-LLC refunded the prepaid rent and deposits.  On July 29,
2010, OMNEL sent a letter to Valpo-LLC confirming cancellation of
the lease, providing notice of Valpo-LLC’s default, giving Valpo-LLC an
opportunity to cure its default within 10 days, and requesting the return
of the prepaid rent and deposits. 
Valpo-LLC did not cure the default, and the lease was terminated.  Valpo-LLC did not return the $57,360 in
prepaid rent and deposits. 

            The amended
complaint alleged two causes of action against Valpo-LLC and one cause of
action for negligence against Tanner Industries and Tanner personally.  In the negligence cause of action, OMNEL
alleged that Tanner “authorized, directed, and meaningfully participated
in the construction of the build-out and the other actions which delayed timely
completion of the build-out and resulted in the build-out not
being completed in a good and workman like [sic] manner in conformity with applicable laws and regulations and
the resultant damage to the leasehold premises.”  OMNEL alleged that Tanner had a “duty to use
ordinary care to prevent OMNEL from being harmed as a result of his individual
negligence in making the decisions and personally performing” the alleged
harmful acts.  OMNEL further alleged that
Tanner knew or should have known of the relationship between OMNEL and
Valpo-LLC, and that his actions were reasonably likely to cause OMNEL economic
harm.  As a result of Tanner’s decision
not to obtain the requisite permits and his other actions,
“. . . OMNEL was unable to timely open its business and suffered
lost profits and lost business opportunities as a result thereof.” 

>Tanner’s Demurrers

            Tanner
filed a demurrer to OMNEL’s original complaint, contending that OMNEL had
failed to state facts sufficient to constitute a cause of action against him
for negligence.  The trial court
sustained the demurrer with leave to amend, reasoning that “[a]ny duty owed by
[Tanner] regarding the management and operation of Tanner Industries and
Valpo-LLC was owed to those entities, not to [OMNEL].”  Thereafter, OMNEL filed the amended
complaint.  Tanner again demurred on the
same grounds. 

            The trial
court sustained the demurrer to the amended complaint without leave to
amend.  The court reasoned that “[t]he
only facts alleged against Defendant Turner relate to his actions in operating
and managing Defendant Tanner Industries,” and that OMNEL alleged only that
Turner’s actions caused it economic harm. 
Relying on United States Liability
Ins. Co. v. Haidinger-Hayes (1970) 1 Cal.3d 586, 595 (>Haidinger-Hayes) and >Frances T. v. Village Green Owners
Assn. (1986) 42 Cal.3d 490, 505-506 (Frances T.), the court reasoned that Tanner did not owe a duty to
OMNEL and was not liable for failing to prevent OMNEL’s economic harm.  The court further reasoned that because
OMNEL did not own the premises but was merely a prospective tenant, “any
property damage to those premises does not constitute harm to [OMNEL].”  The court also reasoned that OMNEL’s argument
that Tanner should be held personally liable because he was actually involved
in the actions that caused OMNEL economic harm, if correct, “would result in
imposing individual liability against anyone who incorporated what is
essentially a one-man business for economic harm done by the corporation.”  The court concluded that such a result
would â€œeviscerate the protection against individual liability that incorporation
would otherwise provide.”  >

>DISCUSSION

>I. 
Standard of Review

            “On appeal from a judgment
dismissing an action after sustaining a demurrer without leave to amend, the
standard of review is well settled.  We
give the complaint a reasonable interpretation, reading it as a whole and its
parts in their context.  [Citation.]  Further, we treat the demurrer as admitting
all material facts properly pleaded, but do not assume the truth of
contentions, deductions or conclusions of law. 
[Citations.]  When a demurrer is
sustained, we determine whether the complaint states facts sufficient to
constitute a cause of action. 
[Citation.]  And when it is
sustained without leave to amend, we decide whether there is a reasonable possibility
that the defect can be cured by amendment: 
if it can be, the trial court has abused its discretion and we
reverse.”  (City of Dinuba v. County of Tulare (2007) 41 Cal.4th 859,
865.)  The burden of proving a reasonable
possibility of amendment is on the plaintiff (Zelig v. County of Los Angeles (2002) 27 Cal.4th 1112,
1126 (Zelig)), and the burden can be
met for the first time on appeal (Kong v.
City of Hawaiian Gardens Redevelopment Agency (2002) 108 Cal.App.4th
1028, 1041-1042). 

>II. 
Limited Liability for Corporate Officers

            OMNEL
contends that the trial court erred in sustaining the demurrer to the amended
complaint, arguing that California case law provides that Tanner is jointly
liable with the corporation because he personally directed and
participated in negligent conduct.  Tanner
contends that, regardless of any liability on the part of Tanner Industries and
Valpo-LLC, he cannot be held personally liable for negligence where, in the
ordinary course of his duties to the corporation, he made decisions that caused
incidental economic harm to OMNEL. 

            Corporate
directors or officers “may be liable, under the rules of tort and agency, for
tortious acts committed on behalf of the corporation [citations].”  (Haidinger-Hayes,
supra, 1 Cal.3d at p. 595.) 
Corporate directors or officers do not incur personal liability for
torts of the corporation merely by reason of their official positions unless
they participate in the wrongful conduct or authorize its commission.  (Frances T.,
supra, 42 Cal.3d at
pp. 503-504.)  The California
Supreme Court has explained that corporate officers and directors are “not
responsible to third persons for negligence amounting merely to nonfeasance, to
a breach of duty owing to the corporation alone; the act must also constitute a
breach of duty owed to [a] third person. 
[Citation.]  Liability imposed upon agents for active participation in tortious acts
of the principal have been mostly restricted to cases involving physical injury,
not pecuniary harm,> to third persons [citations].”  (Haidinger-Hayes,
supra, 1 Cal.3d at p. 595, italics added.)

            In >Haidinger-Hayes, plaintiff, an insurance
company, entered into a general agency contract with the defendant corporation,
Haidinger-Hayes, to underwrite proposals for insurance, determine premium
rates, and to issue contracts of insurance. 
(Haidinger-Hayes, >supra, 1 Cal.3d at
p. 590.)  The corporation’s
president, V.M. Haidinger, negligently computed a premium rate for an
insured, which resulted in economic losses to the plaintiff.  (Id. at
pp. 592-593.)  The California Supreme
Court held that the corporation’s president was not personally liable to the
plaintiff for the economic loss.  (>Id. at p. 595.)

            In >Frances T., the plaintiff was raped
and robbed in her condominium.  She sued
the individual directors on the condominium association board, claiming they had
breached a duty of care owed to her by failing to repair lighting and by
ordering her to remove the external lighting she had installed.  (Frances T.,
supra, 42 Cal.3d at
pp. 498, 503.)  The Supreme Court
reiterated that “directors individually owe a duty of care, independent of the
corporate entity’s own duty, to refrain from acting in a manner that creates an
unreasonable risk of personal injury
to third parties.”  (Frances T., supra,
42 Cal.3d at p. 505, italics added.) 
As it had in Haidinger-Hayes,
the court explained that there are “two traditional limitations on a
corporate officer’s or director’s personal liability for negligence.  First, we concluded that no special agency
relationship imposed personal liability on the defendant corporation’s president
for failing to prevent economic harm to the plaintiff corporation, a client of
his principal.  This conclusion reflected
the oft-stated disinclination to hold an agent personally liable for economic
losses when, in the ordinary course of his duties to his own corporation, the
agent incidentally harms the pecuniary interests of a third party.  ‘Liability
imposed upon agents for active participation in tortious acts of the principal
have been mostly restricted to cases involving physical injury,> not pecuniary harm, to third persons [citations].’ â€href="#_ftn2" name="_ftnref2" title="">[2]  (Frances T.,> supra, at p. 505, italics
added.)  The Frances T. court distinguished Haidinger-Hayes on this basis, reasoning that the actions of the
individual association director defendants had caused a personal injury rather
than mere economic loss as in Haidinger-Hayes;
thus, the condominium association directors could be individually liable to the
plaintiff for her injuries.  (>Frances T., supra, 42 Cal.3d at
pp. 505, 509-512.) 

            OMNEL
relies on Michaelis v. Benavides (1998)
61 Cal.App.4th 681 (Michaelis),
but that reliance is misplaced.  In >Michaelis, the plaintiffs sued Anthony
Benavides, the president and a 50 percent stockholder of a corporation,
for negligence in constructing a patio and a driveway at the plaintiffs’
home.  (Michaelis, supra,> at p. 683.)  Plaintiffs alleged physical damage to the
property resulted from the negligence.  (>Id. at pp. 683-684.)  Based on Haidinger-Hayes,
the trial court granted the defendant’s motion for nonsuit, concluding that the
defendant could not be held personally liable for the damages.  (Michaelis,> supra, 61 Cal.App.4th at pp. 684, 686-687.)  In reversing the judgment, the >Michaelis court reasoned, “[I]n contrast
to the alleged facts here, the plaintiff in Haidinger-Hayes did
not experience any personal injury or injury to property, but only
pecuniary harm . . . .”  (Michaelis,> supra, at p. 686.)  Further,
the court quoted Haidinger-Hayes for
the proposition that the liability of corporate
officers and directors for negligence is “ â€˜mostly restricted to cases involving physical injury,> not pecuniary harm, to third persons[citations].’ â€  (Michaelis,> supra, at p. 686, italics added.) 
Unlike Haidinger-Hayes,
the defendant in Michaelis caused
physical damage to property.  (>Id. at p. 687.) 

            OMNEL also
cites J’Aire Corp. v. Gregory (1979) 24 Cal.3d 799, which
OMNEL asserts has “remarkable factual similarity” to the instant
case.  We find J’Aire to be
remarkably dissimilar in a material way. 
In J’Aire Corp., the plaintiff sued Craig Gregory, a general
contractor who was the sole proprietor of his business, for economic
damages resulting from the delay in completion of renovations to the premises
leased by plaintiff.  (>J’Aire
Corp., supra, 24 Cal.3d at
pp. 802-803.)  That case is
clearly distinguishable.  In >J’Aire
Corp, the defendant’s business
was not incorporated and the defendant was not a corporate officer or
director.  Thus, the court had no
occasion to apply the rules announced in Haidinger-Hayes
regarding the circumstances where a corporate officer or director may be
personally liable to third parties for negligent acts. 

            OMNEL also
cites a number of cases for the proposition that corporate officers and
directors are personally liable for tortious conduct they personally
direct or participate in, even when there is only economic harm.  However, all of the cases OMNEL cites
involve intentional torts as opposed
to negligence and are therefore distinguishable from the reasoning in >Haidinger-Hayes and Frances T. 
(See, e.g., Vacco Industries,
Inc. v. Van Den Berg (1992) 5 Cal.App.4th 34 [misappropriation of
trade secrets]; Wyatt v. Union
Mortgage Co. (1979) 24 Cal.3d 773 [fraud]; Vujacich v. Southern Commercial Co. (1913) 21 Cal.App.
439 [conversion].)  In Frances T.,
the court clearly delineates that the “economic loss[]” limitation relates to a
“corporate officer’s or director’s personal liability for
negligence.”  (Frances T.,
supra, 42 Cal.3d
at p. 505.)  There is no such
limitation for intentional torts. 

            OMNEL
contended at oral argument that the California Supreme Court’s statement in >Haidinger-Hayes that the liability of
corporate officers and directors for negligence is “mostly restricted to
cases involving physical injury” to third persons is â€œold
dicta.”  To the contrary, we view the
Supreme Court’s statement as a now well-settled rule.  It was repeated by our high court in >Frances T., when the court distinguished
that case on the ground that the Frances
T. plaintiff sustained physical injury. 
(Frances T., >supra, 42 Cal.3d at
pp. 504-505.)  And the same rule was
repeated in Michaelis (>Michaelis, supra, 61 Cal.App.4th at pp. 686-687), when that court
distinguished the physical injury to property in that case from the economic
harm in Haidinger-Hayes.  We read our high court’s use of the word
“mostly” as connoting the potential for exceptions to the rule that corporate
officers are not liable to third parties for economic harm resulting from
the corporate officer’s conduct.  One
such exception would be intentional torts.href="#_ftn3" name="_ftnref3" title="">[3]  If, instead, we were to adopt the rule that
OMNEL advocates -- one where a corporate officer or director is personally
liable to third parties for economic damages his or her conduct causes -- we
would, in effect, convert our high court’s carefully worded rule that corporate
officer or director liability is “mostly restricted to cases involving physical
injury” to a rule that states that a corporate officer or director is “always”
liable, regardless of whether the officer or director caused physical injury or
economic damages.  This, we will not
do. 

            OMNEL
contends that the amended complaint alleged property damage to the leasehold
premises, but the premises were neither owned nor occupied by OMNEL.  At oral argument, counsel for OMNEL indicated
that for some reason, OMNEL and Tanner shared occupancy at some point.  But the amended complaint does not suggest
that OMNEL occupied the leasehold premises for any purpose.  In fact, OMNEL repeatedly asserted that it
was not able to occupy the premises, and it was on this basis that OMNEL
claimed it was damaged.  And as we have
already noted, the City never issued a certificate of occupancy.  Nowhere in the record, including OMNEL’s
oppositions to Tanner’s two demurrers, is there evidence that OMNEL occupied
the leasehold premises for any purpose. 

            At oral
argument, counsel for OMNEL also argued that OMNEL had prepaid rent, the
implication being that OMNEL was entitled to occupy the premises.  But the term of the lease had not
commenced.  The amended complaint alleges
that after delays in construction, Tanner and OMNEL orally agreed that “rent
would not commence until the build-out was completed and a certificate
of occupancy was issued.”  Thus, any damage to the property caused by
Tanner was injurious only to Valpo-LLC as the landlord.  Indeed, OMNEL does not claim in the amended
complaint that it is entitled to relief for property damage.  Instead, OMNEL asserts only economic damages
related to lost profits and business opportunities. 

            Because
OMNEL cannot allege it suffered personal injury or property damage,
we hold that the “traditional limitation[]” identified by our high court
in Haidinger-Hayes and >Frances T. applies here.  Tanner is not personally liable for economic
damages caused by any negligent acts he committed in the course and scope of
his corporate duties.  To hold otherwise
would defeat the purpose of limited liability and unravel the balance our high
court has struck between shielding corporate officers from personal liability
when their negligent decisions cause economic harm and protecting third parties
who suffer physical injuries or property damage. 

            Based on
the facts OMNEL does allege, we conclude there is no reasonable possibility of curing
the defects in the amended complaint by yet another amendment.  Indeed, OMNEL has the burden in this regard (>Zelig, supra, 27 Cal.4th
at p. 1126), and it does not specify how it could amend the complaint to
state a valid cause of action against Tanner.

            Accordingly,
the trial court properly sustained Tanner’s demurrer without leave to amend the
complaint. 

>DISPOSITION

            The
judgment is affirmed.  The parties shall
bear their own costs on
appeal.  (Cal. Rules of Court, rule
8.278(a)(5).)

 

 

 

                                                                                                        MURRAY                         ,
J.

 

 

 

We concur:

 

 

 

                     RAYE                            , P. J.

 

 

 

                    HOCH                           ,
J.