State Compensation Ins. Fund v. De Leon CA2/8

Filed 9/3/14 State Compensation Ins. Fund v. De Leon CA2/8
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IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
SECOND APPELLATE DISTRICT
DIVISION EIGHT
STATE COMPENSATION INSURANCE B250854
FUND,
(Los Angeles County
Plaintiff and Respondent, Super. Ct. No. BC444757)
v.
FRANCISCO D. DE LEON,
Defendant and Appellant.
APPEAL from a judgment of the Superior Court of Los Angeles County.
Teresa Sanchez-Gordon, Judge. Reversed and remanded.
Law Offices of Robert D. Coppola, Jr., and Robert D. Coppola, Jr. for Defendant
and Appellant.
Linda S. Platisha, Staff Counsel; Horvitz & Levy, Mitchell C. Tilner and Jean M.
Doherty for Plaintiff and Respondent.
________________________________
State Compensation Insurance Fund (hereafter State Fund) filed an action against
F.D. De Leon & Associates, Inc., FDDA Incorporated, and Francisco D. De Leon,
naming all three defendants in causes of action for breach of written contract and fraud
by affirmative misrepresentation and concealment of fact.1 State Fund filed a motion for
summary judgment or, in the alternative, summary adjudication of issues. The notice of
motion did not expressly identify any particular defendant or any issue to be adjudicated.
However, in the “Conclusion” section of its memorandum of points and authorities in
support of its motion, State Fund requested “that a judgment be entered against DeLeon,
individually, for fraud[,] and against [F.D. De Leon & Associates, Inc. and FDDA
Incorporated], joint and severally for $1.5 million.” The trial court granted State Fund’s
motion for summary judgment, and entered a judgment awarding $1.5 million to State
Fund “from defendants Francisco D. DeLeon, individually, and F.D. DeLeon &
Associates[, Inc.] and FDDA Incorporated . . . .”
Francisco D. De Leon, in his capacity as an individual defendant, filed an appeal.
We reverse the judgment insofar as it awards relief against Francisco D. De Leon.
FACTS
The Contract
State Fund is a public enterprise fund which provides workers’ compensation
insurance to employers. (See Ins. Code, § 11770 et seq.) F.D. De Leon Associates, Inc.
acted as a collection agency for the State Fund. Francisco D. De Leon allegedly is an
officer of F.D. De Leon Associates, Inc.2
1
The complaint also alleged causes of action for equitable accounting, alter ego
theory, and for civil conspiracy, which are actually more remedies than causes of action.
2
We deliberately state “allegedly is an officer” because there is no evidence in the
record (e.g., by way of an admission in an answer, or by any deposition testimony, or by
any proper reference to an officially filed corporate record) that Francisco D. DeLeon is,
in fact, an officer of F.D. DeLeon Associates, Inc. The only “showing” that we see in the
record that Francisco D. DeLeon is an officer of F.D. DeLeon Associates, Inc is an
allegation to that effect in State Fund’s complaint. This is not merely a matter of the rule
that, “ ‘if it is not set forth in the separate statement, it does not exist’ ” (see United
2
State Fund and F.D. De Leon & Associates, Inc. entered into a written Master
Service Agreement (MSA). Under the terms of the MSA, F.D. De Leon & Associates,
Inc. agreed to collect and remit to State Fund outstanding premiums owed to State Fund
by former policyholders under workers’ compensation policies that had been cancelled.
In more colloquial terms, State Fund hired F.D. De Leon & Associates, Inc. to collect
past due debts on behalf of State Fund. The MSA required F.D. De Leon & Associates,
Inc. to deposit payments that it collected into a trust account, and, once a payment
“cleared the banking system,” to remit the payment to State Fund on the first week of the
following month. The MSA required each remittance to include a statement indentifying
the policy account upon which payment had been collected, the commission due to F.D.
De Leon & Associates, Inc. (calculated pursuant to a prescribed commission fee
schedule) and the “amount due to State Fund.”
When F.D. De Leon & Associates, Inc. remitted a payment and the accompanying
collection statement as required under the MSA, a State Fund employee in the billing and
collections department would reconcile the account. The actual check received from F.D.
& Associates, Inc. would be sent to State Fund’s “Cash Receipts Unit,” where it would be
applied to the policyholder’s account. The full amount of the payment that F.D. De Leon
& Associates, Inc. collected from a policyholder would be noted in a “Collection Inquiry
Report” prepared for each policyholder.
The MSA required F.D. De Leon & Associates, Inc. to “maintain its customary
form of records, including . . . records reasonably required to (i) compute and verify the
amount of any collection fees billed to State Fund by [F.D. De Leon & Associates,
Inc.] . . . and (ii) confirm compliance of [F.D. De Leon & Associates, Inc]’s obligations
contained in [the MSA].” In addition, the MSA required F.D. De Leon & Associates,
Inc. to “permit State Fund to inspect [F.D. De Leon & Associates, Inc.]’s records at [its]
usual place of business and/or at the authorized subcontractor’s usual place of
business . . . for the purpose of verifying the amounts payable to [F.F. De Leon &
Community Church v. Garcin (1991) 231 Cal. App. 3d 327, 337); this is a matter of there
being no evidence in the record to support an alleged fact.
3
Associates, Inc.] . . . and confirming [F.D. De Leon & Associates, Inc.]’s compliance
with [the MSA].” Further, the MSA provided that F.D. De Leon & Associates, Inc.’s
services were “subject to inspection and examination by State Fund, at State Fund’s
expense, at all reasonable times and places during the term of [the MSA].”
State Fund’s Investigation
In July 2010, “it was brought to [the] attention” of State Fund’s program manager
of credit and collections, Elizabeth Redican, that a former State Fund policyholder by the
name of RDF Production Builders had delivered a $275,000 check “to DeLeon [sic]” in
October 2007 as payment for outstanding premiums owed to State Fund. A copy of this
check was attached as an exhibit to Redican’s declaration; the check was made payable to
both State Fund and “F.D. DeLeon & Associates.” A stamped endorsement on the back
of the check states “For deposit only F.D. De Leon & Associates, Inc. Client Trust
Account,” at a bank in Encino. According to Redican, the check promptly “cleared
DeLeon’s account [sic].” We assume Redican meant to state that RDF’s bank honored
its customer’s check, and forwarded payment to the F.D. De Leon & Associates, Inc.
Client Trust Account at the Encino bank. Further, Redican stated that she “could find no
record of State Fund receiving this payment from DeLeon [sic].” Redican then “made
repeated attempts over an extended period of time to contact DeLeon [sic] for an
explanation.” She “never received any explanation concerning this check from DeLeon
[sic].”3
After Redican discovered there was no record of RDF’s payment being received
by State Fund, she initiated an internal audit. Redican “determined that many former
State Fund policyholders had sent money to DeLeon [sic] for past due premium[s] and
that DeLeon [sic] had failed to remit the money collected to State Fund.” According to
3
The facts in this paragraph and in the following paragraph come from Redican’s
declaration in support of State Fund’s motion for summary judgment or summary
adjudication of issues. We have highlighted Redican’s repeated references to “DeLeon”
to note that the facts recounted by Redican do not attempt to distinguish between any of
the three named defendants in State Fund’s complaint, i.e., F.D. De Leon & Associates,
Inc., FDDA Incorporated, and Francisco D. De Leon.
4
Redican, “DeLeon [sic] received at least 34 additional checks from former State Fund
policyholders where no money was ever remitted to State Fund.” Copies of checks from
multiple State Fund clients, usually made payable to State Fund, were attached as
exhibits to Redican’s declaration; each of these checks, as with the RDF check discussed
above, included a stamped endorsement on the back of the check which stated “For
deposit only F.D. De Leon & Associates, Inc. Client Trust Account,” at a bank in Encino.
Again, Redican could find no record that any part of these payments had been remitted to
State Fund. Redican ultimately determined “that at a minimum $1.5 million dollars was
collected by DeLeon [sic] and never remitted to State Fund.” Redican stated she would
“not be able to determine exactly how much was misappropriated unless and until State
Fund has access to DeLeon’s [sic] computers and is able to conduct a forensic
accounting.”
The Litigation
In August 2010, State Fund filed a complaint against F.D. De Leon & Associates,
Inc., alleging causes of action for breach of written contract and fraud by affirmative
misrepresentation and concealment of fact. State Fund’s complaint alleged that the
failure of F.D. De Leon & Associates, Inc. to remit payments to State Fund constituted a
breach of the parties’ MSA, and that failure to remit payments was accompanied with the
intent to defraud, which included presenting false monthly reports of the amount of
collections. State Fund’s complaint also named FDDA Incorporated, as an alleged “sister
company” or “successor-in-interest” to F.D. De Leon & Associates, Inc., in both causes
of action. State Fund’s complaint also named Francisco D. De Leon, individually, as an
alleged “officer” of F.D. De Leon & Associates, Inc., in both causes of action. As to
Francisco D. De Leon, individually, the complaint does not allege any specific
misstatement of fact out of his mouth, or concealment of fact by him personally; the
5
complaint broadly alleged “all defendants” defrauded State Fund. The complaint alleged
“alter ego theory” as to Francisco D. De Leon.4
In March 2011, F.D. DeLeon & Associates, Inc., FDDA Incorporated, and
Francisco D. De Leon filed a joint answer to State Fund’s complaint, generally denying
all of the allegations in the pleading.5
In January 2013, State Fund filed a motion for summary judgment, or, in the
alternative, summary adjudication of issues. The notice of motion did not identify toward
which of the three named defendants, i.e., F.D. De Leon & Associates, Inc., FDDA
Incorporated, and Francisco D. De Leon, the motion was actually directed. The
alternative motion for summary adjudication of issues did not expressly state what issues
it was that State Fund wanted to be adjudicated.
State Fund’s memorandum of points and authorities in support of its motion
contained four pages of argument within which the following argument headings are
found: “DeLeon [sic] fraudulently failed to remit money due to State Fund;” “DeLeon
has breached the contract he signed on behalf of F.D. DeLeon and Associates, Inc.;” and
“Summary judgment is appropriate as to F.D. DeLeon & Associates, FDDA Inc. and the
filed cross-complaint.” State Fund’s arguments were somewhat vague in referring only
to “DeLeon.” In the “Conclusion” of its memorandum of points and authorities, State
Fund asked the trial court “that a judgment be entered against DeLeon, individually for
4
State Fund’s complaint included separate causes of action for “civil conspiracy”
and “alter ego” alleging that Francisco D. De Leon was individually liable for the breach
of contract and fraud committed by F.D. Associates, Inc. We note there is no cause of
action for civil conspiracy or for alter ego. Instead, they are legal theories for imposing
liability on defendants for acts ostensibly committed by a business entity.
5
F.D. De Leon & Associates, Inc., alone, filed a cross-complaint alleging several
contract-related causes of action against State Fund. The thrust of the cross-complaint
alleged that State Fund had failed to pay F.D. De Leon & Associates, Inc. for collection
successes obtained by F.D. De Leon & Associates, Inc. At the time of State Fund’s
motion for summary judgment, State Fund presented evidence (a reference to the
Secretary of State’s website) showing that F.D. De Leon & Associates, Inc. was a
suspended corporation. Based on this evidence, such as it was, State Farm argued that
F.D. De Leon & Associates, Inc. could not pursue its cross-complaint.
6
fraud, and against [F.D. De Leon & Associates, Inc. and FDDA Incorporated], joint and
severally for $1.5 million.”
State Fund’s separate statement includes facts continued the agency’s vague use of
“De Leon” without differentiating among the named corporate defendants and Francisco
D. De Leon the individual. Generously construed, the separate statement included facts
that certain State Fund clients delivered premium payments “to DeLeon,” and that State
Fund had not received money “from De Leon” in kind. There are no facts within State
Fund’s separate statement concerning who owned F.D. De Leon & Associates, Inc., or
who its officers were, although Elizabeth Redican’s declaration (ante) underlying State
Fund’s separate statement included an averment that F.D. De Leon & Associates, Inc. is
owned by Francisco D. De Leon.
No defendant filed opposition to State Fund’s motion, but Francisco De Leon, in
his capacity as an individual defendant, filed objections to certain evidence presented in
State Fund’s motion. For example, Francisco D. De Leon objected that the averment in
Elizabeth Redican’s declaration that he owned F.D. De Leon & Associates, Inc. lacked
personal knowledge. Francisco D. De Leon also objected that information regarding
which of State Fund’s clients had made payments “to DeLeon” were hearsay.
At a hearing on May 20, 2013, the trial court heard State Fund’s motion. At the
very outset of the hearing, the trial court indicated its ruling as follows: “[T]he plaintiff’s
motion for summary judgment is granted on the grounds that . . . defendant failed to remit
money to plaintiff, breaching the contract.” In response to the court’s ruling, counsel for
Francisco D. De Leon stated he wanted to address the summary judgment motion “in
regards to Frank De Leon as an individual.” Counsel noted that the MSA (ante) included
the following express provision: “[F.D. De Leon & Associates, Inc.] and State Fund
intend that this agreement shall not benefit or create any right or cause of action in,
against, or on behalf of any person or entity other than the parties.” Counsel argued that
State Fund could not win summary judgment against Francisco D. De Leon based on the
MSA. In response, State Fund’s counsel explained the scope of the agency’s motion as
follows: “Your Honor, we only sought summary adjudication against the corporation for
7
breach of contract. Mr. De Leon was summary adjudication for fraud.” The trial court
expressly referred to the “defendant corporation,” on more than one occasion during the
hearing. In the end, the trial court stated that the evidentiary objections filed by the
“defendant” could not be considered because while “defendant is a suspended
corporation,” and that, as a suspended corporation, “it” could not defend the action.
Ultimately, the trial court granted summary judgment on the basis the corporation was
suspended. The court overruled the evidentiary objections filed by Francisco De Leon,
again stating the same ground that the defendant corporation was suspended. The trial
court’s minute order is in accord with its statements during the hearing; it reads as
follows:
“Plaintiff’s motion for summary judgment is granted on the grounds
that there is no triable issue of fact that defendant failed to remit money to
plaintiff breaching the contract.”
On June 18, 2013, the trial court signed and entered a judgment prepared by State
Fund’s lawyers. The judgment, in its entirety, reads as follows:
“On May 20, 2013, the Court ruled on [State Fund’s] Motion for
Summary Judgment or in the Alternative Summary Adjudication. The
Court granted State Fund’s Motion in its entirety and found that Francisco
DeLeon, an individual, had defrauded State Fund and that F.D. DeLeon &
Associates[, Inc.] and FDDA Incorporated are suspended corporations
which may not either defend themselves nor bring an affirmative action and
as such, are also liable to State Fund for damages for breach of contract.
“IT IS THEREFORE ORDERED, ADJUDGED, AND DECREED
that [State Fund] shall recover from defendants Francisco D. DeLeon,
individually, and F.D. DeLeon & Associates[, Inc.] and FDDA
Incorporated the principal sum of $1,500,000.00.”
Francisco D. De Leon, in his capacity as an individual defendant, filed a timely
notice of appeal.
8
DISCUSSION
I. Framework
Summary judgment is proper where “all the papers submitted show that there is no
triable issue as to any material fact and that the moving party is entitled to a judgment as
a matter of law.” (Code Civ. Proc., § 437c, subd. (c).) When a plaintiff files a motion for
summary judgment, the burden is on the plaintiff to present admissible evidence on each
element of his or her “cause of action” against the defendant, thus entitling the plaintiff to
judgment. (Code Civ. Proc., § 437c, subd. (p)(1); and see, e.g., S.B.C.C., Inc. v. St. Paul
Fire & Marine Ins. Co. (2010) 186 Cal. App. 4th 383, 388.)
We review a grant of summary judgment de novo, considering all of the evidence
in the supporting and opposition papers, except that to which objections have been made
and sustained by the court, and all inferences that are reasonably deducible from the
evidence and uncontradicted. (Artiglio v. Corning Inc. (1998) 18 Cal. 4th 604, 612.)
“In independently reviewing a motion for summary judgment, we apply the same three-
step analysis used by the superior court. We identify the issues framed by the pleadings,
determine whether the moving party has negated the opponent’s claims, and determine
whether the opposition has demonstrated the existence of a triable, material factual
issue.” (Silva v. Lucky Stores, Inc. (1998) 65 Cal. App. 4th 256, 261.) We independently
decide whether the undisputed facts warrant judgment for the moving party as a matter of
law. (Intel Corp. v. Hamidi (2003) 30 Cal. 4th 1342, 1348.)
II. Fraud
Francisco D. De Leon contends the judgment against him as an individual
defendant must be reversed because State Fund failed to meet its initial evidentiary
burden on its motion for summary judgment to show that he was liable on State Fund’s
cause of action for fraud. We agree.
The elements of fraud are (a) misrepresentation (false representation, concealment,
or nondisclosure); (b) knowledge of falsity; (c) intent to induce reliance; (d) justifiable
reliance; and (e) resulting damage. (Lazar v. Superior Court (1996) 12 Cal. 4th 631, 638.)
State Fund’s complaint alleged a cause of action for fraud against “all defendants.”
9
Turning first to the pleadings, State Fund’s fraud cause of action was premised on
an amalgam of claims of misrepresentation of fact, and concealment of fact, based on the
following allegations:
“All Defendants intentionally concealed, failed to disclose and/or materially
misrepresented the amount of money collected on behalf of State Fund and deliberately
falsified the monthly reports sent to State Fund, particularly the gross amount collected,
and [mis]represented to State Fund that the reports were true and accurate knowing that
the reports were inaccurate. The Defendants did this with the intent of inducing State
Fund to believe that the gross amount collected was less than what was actually collected
from the accounts State Fund assigned to [F.D. De Leon & Associates, Inc.].”
“Defendants had a legal duty to fully and accurately remit all funds due to State
Fund and to accurately report all checks received. Defendants also had a legal duty to
make sure all checks were placed in the designated State Fund trust account that
Defendants maintained for State Fund’s benefit. Defendants actively concealed the
amount of money received and due State Fund and misappropriated money due to State
Fund for their own benefit.”
Analysis
Francisco D. De Leon argues on appeal that State Fund’s motion failed to present
any evidence showing that he personally made any misrepresentation or concealed any
fact. We agree.
As noted above, State Fund’s motion for summary judgment was supported by a
separate statement of undisputed fact and a memorandum of points and authorities that
did not distinctly differentiate between “De Leon” as a corporate entity with which State
Fund had contracted and “De Leon” an individual who was not actually shown to control
the corporate entity. As the trial court appreciated, State Fund’s motion for summary
judgment showed that De Leon the corporate entity breached the parties’ contract when it
did not remit money owed to State Fund. But this did not prove fraud by De Leon the
corporate entity, and did not prove fraud by De Leon the individual who may or may not
have had control of the corporate entity. In short, State Fund’s evidence did not show
10
who, specifically, made any representation or did any act constituting fraud against State
Fund. State Fund’s evidence failed to show that Francisco D. De Leon, individually and
personally, collected payments, or that he personally was responsible for the non-
remittances or that he personally submitted reports which fraudulently understated the
amount of payments recovered on behalf of State Fund. Given the contextual setting of
the contract relationship giving rise to all of State Fund’s causes of action, i.e., the
contract with F.D. De Leon & Associates, Inc., State Fund’s repeated and bald references
to “DeLeon” in its motion must be construed under the summary judgment statute to refer
only to F.D. De Leon & Associates, Inc. The documentary evidence (the exhibits in the
forms of checks and reports attached to Redican’s declaration) are also consistent with
showing actions taken by F.D. De Leon & Associates, Inc., not Francisco D. De Leon in
an individual capacity.
We have reviewed State Fund’s motion, and do not see any actual evidence that
Francisco D. De Leon made any representation to State Fund, or did any fraudulent act as
to State Fund. If an officer or employee or agent of F.D. De Leon & Associates, Inc. did
a fraudulent act in the course and scope of their employee or agent role, then F.D. De
Leon & Associates, Inc. could be liable for fraud. Also, if Francisco D. De Leon, the
individual, personally made any misrepresentation, or ratified a misrepresentation of
another, or personally committed a fraudulent act, or if he ratified, in his role as an officer
of the corporation, some fraudulent representation or act of another, then Francisco D. De
Leon could be liable, individually. But, there simply is no evidence showing that
Francisco D. De Leon, individually, did anything. We do not suggest that State Fund
cannot establish its case against Francisco D. De Leon, only that its summary judgment
motion here did not do so.
11
III. Breach of Contract
Francisco D. De Leon next contends the judgment against him must be reversed
because State Fund did not meet its initial burden on its motion for summary judgment to
show that he was liable on State Fund’s cause of action for breach of contract. Ignoring
that State Fund’s counsel made an express representation at the hearing on State Fund’s
motion that the agency was not seeking a finding of liability against Francisco D. De
Leon for breach of contract, again, we agree with Francisco D. De Leon’s argument on
appeal. Also, the judgment does not seem to be based on contract liability as to De Leon
the individual.
An exegetic discussion is unnecessary. Although State Fund alleged a cause of
action for breach of contract “against all defendants,” the only contract which was the
subject of State Fund’s pleading was the MSA between State Fund and F.D. De Leon &
Associates, Inc., a copy of which State Fund attached to its pleading. Because State Fund
had no contract with Francisco D. De Leon as an individual, he can have no liability to
State Fund for breach of contract, except, perhaps by a showing that Francisco D. De
Leon was the alter ego of F.D. De Leon & Associates, Inc. The problem is that State
Fund’s motion did not include any evidence on its allegation of alter ego liability.
State Fund’s argument that Francisco D. De Leon “lacks standing” to appeal the
judgment as to State Fund’s cause of action for breach of contract is troubling on two
fronts. First, State Fund’s position that the judgment entered against Francisco D. De
Leon does not reflect liability on State Fund’s cause of action for breach of contract
against F.D. De Leon & Associates, Inc., with an alter ego finding, but only for fraud
directly committed by Francisco D. De Leon, individually, would mean that the trial
court did not find in favor of State Fund on all of the causes of action that State Fund
alleged against Francisco D. De Leon. Second, as we explained above, State Fund’s
motion did not in any event prove fraud liability on the part of Francisco D. De Leon
individually.
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IV. Alter Ego Liability
Francisco D. De Leon contends the judgment against him as an individual
defendant must be reversed because State Fund did not meet its initial burden on its
motion for summary judgment to show that he was liable on State Fund’s complaint as
the alter ego of F.D. De Leon & Associates, Inc. Assuming liability were predicated on
an alter ego theory -- a position which State Fund refutes on appeal -- we agree.
State Fund’s motion for summary judgment did not present any evidence of which
would support “piercing the corporate veil” under the alter ego doctrine such that
Francisco D. De Leon may be held liable based on the liability of F.D. De Leon &
Associates, Inc. for fraud or breach of contract.
State Fund’s response on appeal that the judgment did not affix liability based on
the alter ego theory, but on Francisco D. De Leon’s personal liability for fraud, is not
persuasive for the reasons explained above.
V. Evidentiary Rulings
Because we have found that the summary judgment in favor of State Fund as to
Francisco D. De Leon, individually, must be reversed for other reasons, we need not
reach Francisco D. De Leon’s argument that the trial court abused its discretion in
overruling his evidentiary objections to certain evidence presented in State Fund’s motion
for summary judgment. We note only that a defendant corporation’s suspended status
does not, in and of itself, necessarily act as a bar to a separately named, individual
defendant’s evidentiary objections.
DISPOSITION
The judgment is reversed insofar as it awards relief against Francisco D. De Leon,
individually. The case is remanded to the trial court with directions to enter an order
denying State Fund’s motion for summary judgment, and its alternative motion for
summary adjudication of issues, as to Francisco D. De Leon, individually, and to set State
Fund’s complaint against Francisco D. De Leon, individually, on track for a jury or court
trial. Conjointly or in the alternative, because a judgment has been entered against F.D.
De Leon & Associates, Inc., and because that judgment is now final, State Fund may, if it
13
so chooses, pursue its claim for alter ego liability against Francisco D. De Leon, an issue
for which a jury trial is not required. (See Dow Jones Co. v. Avenel (1984) 151
Cal. App. 3d 144, 147-148.) Appellant is awarded costs on appeal.
BIGELOW, P.J.
We concur:
FLIER, J.
GRIMES, J.
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