Fischler Kapel Holdings, LLC v. Flavor Producers, LLC

• Court: District Court, C.D. California
• Decided: February 4, 2022
• Docket: 2:19-cv-10309
• Status: Unknown

Opinion

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1 O 2 3 4 5 6 7 United States District Court 8 9 Central District of California 10

11 FISCHLER KAPEL HOLDINGS, LLC, et Case № 2:19-cv-10309-ODW (GJSx) al., 12 ORDER DENYING 13 Plaintiffs, COUNTERCLAIM-DEFENDANTS’ v. MOTION TO DISMISS 14 COUNTERCLAIMS [85] 15 FLAVOR PRODUCERS, LLC, et al., 16 Defendants. 17 18 19 I. INTRODUCTION 20 On August 30, 2021, Defendant Flavor Producers, LLC brought a Counterclaim 21 against Plaintiffs and Counterclaim-Defendants Richard Fischler and Paula Kapel. 22 (Countercl., ECF No. 81.) Before the Court is Counterclaim-Defendants’ Motion to 23 Dismiss Counterclaims pursuant to Federal Rule of Civil Procedure (“Rule”) 12(b)(6). 24 (Mot. Dismiss (“Mot.”), ECF No. 85.) The Motion is fully briefed. (Opp’n, ECF 25 No. 90; Reply, ECF No. 91.) For the reasons that follow, Counterclaim-Defendants’ 26 Motion is DENIED.1 27

28 1 After carefully considering the papers filed in connection with the Motion, the Court deemed the matter appropriate for decision without oral argument. Fed. R. Civ. P. 78; C.D. Cal. L.R. 7-15. Case 2:19-cv-10309-ODW-GJS Document 103 Filed 02/04/22 Page 2 of 9 Page ID #:2154

1 II. BACKGROUND 2 For purposes of this Rule 12(b)(6) motion, the Court accepts Flavor Producers’s 3 well-pleaded allegations as true. Lee v. City of Los Angeles, 250 F.3d 668, 688 (9th Cir. 4 2001). 5 In April 2017, Flavor Producers and non-party Creative Concepts Holdings, Inc. 6 (“Creative Holdings”) entered into an Asset Purchase Agreement (“APA”)2 with 7 Fischler and Kapel and their company Creative Flavor Concepts, Inc. (“CFC”). 8 (Countercl. ¶¶ 29–30; see also Decl. Richard Fischler (“Fischler Decl.”) ¶ 3, Ex. B 9 (“APA”), ECF No. 87.) As part of the agreement, Flavor Producers, referred to as 10 “Flavor Buyer” in the APA, agreed to purchase from CFC certain “Flavor Assets,” 11 which included portions of CFC’s business and associated customer contracts. (See 12 APA 2, 6.) Additionally, Creative Holdings, referred to as “Buyer” in the APA, agreed 13 to purchase from CFC other “Assets” consisting of much of the remaining portions of 14 CFC’s business. (See id. at 2, 7–8.) 15 Article 7 of the APA sets forth several representations and warranties expressly 16 made “[a]s an inducement to Buyer to enter this Agreement.” (See Countercl. ¶ 66; 17 APA 17–30.) Of relevance, the APA attested to the accuracy of two exhibits listing 18 TruYou Health (“TruYou”) as a current and active customer of CFC responsible for 19 generating annual sales exceeding one million dollars. (Countercl. ¶¶ 23–24, 28, 45, 20 67.) In actuality, TruYou was no longer one of CFC’s customers. (Id. ¶¶ 55, 67.) Prior 21 to July 2015, TruYou had contracted to buy products from CFC that TruYou in turn 22 sold to Interush Media, LLC. (Id. ¶¶ 46, 53.) However, in July 2015, CFC entered into 23 an agreement with TruYou pursuant to which CFC could sell its products directly to 24 Interush in exchange for royalty-type payments to TruYou (“TruYou Agreement”). (Id. 25 ¶ 54.) TruYou thereafter stopped purchasing CFC products. (Id. ¶ 55.) Despite being 26 aware of the above circumstances, Fischler and Kapel deliberately misrepresented 27 2 Flavor Producers’s Counterclaim makes extensive reference to, and is substantially based on, the 28 APA. (See, e.g., Countercl. ¶¶ 30, 34.) Accordingly, the Court deems the APA incorporated into the Counterclaim by reference. See United States v. Ritchie, 342 F.3d 903, 908 (9th Cir. 2003).

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1 TruYou as being a CFC customer. (Id. ¶ 67.) Relatedly, Flavor Producers contends 2 that, although Article 7 of the APA represented that another exhibit to the APA listed 3 all of CFC’s existing obligations, Fischler and Kapel intentionally omitted the TruYou 4 Agreement from that exhibit. (Id. ¶¶ 69–71.) 5 In December 2016, CFC breached the TruYou Agreement by selling products to 6 Interush without making the required royalty payments to TruYou under the TruYou 7 Agreement. (Id. ¶ 58.) Nevertheless, in the APA, which the parties executed in April 8 2017, Fischler and Kapel represented to Flavor Producers that there were “no Claims, 9 counterclaims, actions, suits, countersuits, proceedings, or investigations pending or, to 10 the best knowledge of [Fischler, Kapel, and CFC], threatened against or affecting 11 [CFC].” (Id. ¶ 85; APA 18.) At the time Flavor Producers agreed to the APA, it was 12 not aware of CFC’s breach. (Countercl. ¶ 85.) 13 In late 2017, after the APA was executed, TruYou filed a lawsuit against Fischler, 14 CFC, and Flavor Producers based on CFC’s breach of the TruYou Agreement (“TruYou 15 Litigation”). (Id. ¶¶ 87–88.) Flavor Producers incurred substantial costs defending 16 itself and eventually reached a settlement agreement with TruYou. (Id. ¶ 89.) 17 Under Article 14 of the APA, Fischler and Kapel agreed to indemnify and hold 18 harmless the “Buyer Parties,” which the APA defined as referring to Flavor Producers 19 and Creative Holdings, with respect to “any Claim, suit, demand, action, cause of action, 20 loss, cost, damage, Claim, expense, fine, penalty, or other amount . . . suffered or 21 incurred by Buyer” resulting from Fischler’s or Kapel’s breach of an obligation under 22 the APA. (Countercl. ¶ 95; APA 39.) Fischler and Kapel also agreed to indemnify and 23 hold harmless the “Buyer Parties” for all of CFC’s liabilities and contingent liabilities 24 existing at the time the APA was executed. (Countercl. ¶ 96; see also APA 2, 39.) 25 Nevertheless, Fischler and Kapel refused to indemnify Flavor Producers for the costs it 26 incurred in the TruYou Litigation. (Countercl. ¶ 99.) 27 Flavor Producers now brings claims for (1) fraudulent inducement, (2) breach of 28 representations and warranties, (3) breach of the indemnification provisions of the

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1 APA, and (4) violation of California’s Unfair Competition Law. (See Countercl. ¶¶ 63– 2 107.) Fischler and Kapel move to dismiss each of these claims. (See generally Mot.) 3 III. LEGAL STANDARD 4 A court may dismiss a complaint under Rule 12(b)(6) for lack of a cognizable 5 legal theory or insufficient facts pleaded to support an otherwise cognizable legal 6 theory. Balistreri v. Pacifica Police Dep’t, 901 F.2d 696, 699 (9th Cir. 1988). A 7 complaint need only satisfy the minimal notice pleading requirements of Rule 8(a)(2)— 8 a short and plain statement of the claim—to survive a dismissal motion. Porter v. Jones, 9 319 F.3d 483, 494 (9th Cir. 2003). The factual “allegations must be enough to raise a 10 right to relief above the speculative level.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 11 555 (2007); Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (holding that a claim must be 12 “plausible on its face” to avoid dismissal). 13 A court is generally limited to the pleadings and must construe all “factual 14 allegations set forth in the complaint . . . as true and . . . in the light most favorable” to 15 the plaintiff. Lee, 250 F.3d at 679. However, a court need not blindly accept conclusory 16 allegations, unwarranted deductions of fact, and unreasonable inferences. Sprewell v. 17 Golden State Warriors, 266 F.3d 979, 988 (9th Cir. 2001). Ultimately, there must be 18 sufficient factual allegations “to give fair notice and to enable the opposing party to 19 defend itself effectively,” and the “allegations that are taken as true must plausibly 20 suggest an entitlement to relief, such that it is not unfair to require the opposing party 21 to be subjected to the expense of discovery and continued litigation.” Starr v. Baca, 22 652 F.3d 1202, 1216 (9th Cir. 2011). 23 IV. DISCUSSION 24 For the following reasons, each of Flavor Producers’s four counterclaims is 25 sufficiently pleaded and will not be dismissed at this stage. 26 A. Fraudulent Inducement 27 To plead a claim for fraudulent inducement under California law, a plaintiff must 28 allege (1) a misrepresentation, (2) knowledge of falsity, (3) intent to defraud,

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1 (4) justifiable reliance, and (5) resulting damage. Lazar v. Superior Court, 12 Cal. 4th 2 631, 638 (1996). Here, Flavor Producers properly alleges each of these required 3 elements. Flavor Producers points to multiple misrepresentations that Fischler and 4 Kapel made under Article 7 of the APA. For example, Article 7 states that TruYou was 5 a CFC customer responsible for bringing in over a million dollars in annual revenue 6 when, according to Flavor Producers, TruYou brought in no annual revenue and instead 7 represented a liability to CFC. (Countercl. ¶ 67.) Flavor Producers further alleges that, 8 despite knowing these statements were false, Fischler and Kapel made them in order to 9 induce Flavor Producers into accepting the APA. (Id. ¶ 76.) Flavor Producers contends 10 that it relied on these misrepresentations, present in the APA itself, when it agreed to 11 the terms of the APA. (Id. ¶¶ 77–78.) Finally, Flavor Producers maintains that if it had 12 known the truth underlying Fischler’s and Kapel’s various misrepresentations, it would 13 not have entered into the APA and would have avoided losses associated with the 14 transaction of no less than $12.8 million. (Id. ¶¶ 79–81.) 15 Fischler and Kapel primarily argue that any misrepresentations they may have 16 made were directed at Creative Holdings, and not to Flavor Producers, and that any 17 intent to defraud was similarly limited in scope to Creative Holdings. (See Mot. 7–8.) 18 In support of their argument, Fischler and Kapel point out that the representations in 19 Article 7 of the APA, upon which Flavor Producers allegedly relied, were preceded by 20 the words “[a]s an inducement to Buyer to enter this Agreement, Seller Parties hereby 21 jointly and severally represent, warrant and agree.” (See id.; APA 17.) Fischler and 22 Kapel reason that, because “Buyer” refers only to Creative Holdings, any 23 misrepresentations that followed necessarily apply only to Creative Holdings and not to 24 Flavor Producers. 25 The Court disagrees. The prefatory statement to which Fischler and Kapel point 26 represents nothing more than the fact that the parties agreed in an express writing that 27 the representations in Article 7 were made in order to induce Creative Holdings to enter 28 into the agreement. Thus, the exclusion of Flavor Producers from the prefatory

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1 statement does not necessarily mean that the representations in Article 7 were not also 2 made to Flavor Producers. Flavor Producers was party to the APA, and it is illogical to 3 hold on the basis of contractual language that the representations in the APA could be 4 the basis for one contracting party’s fraud claim but not the other’s. Fraudulent 5 inducement, after all, sounds in tort, not in contract, Hinesley v. Oakshade Town Ctr., 6 135 Cal. App. 4th 289, 294 (2005), so the contents of the contract do not change the 7 essential wrongful nature of the misrepresentation. 8 Moreover, to the extent Fischler and Kapel argue that the APA acts as a limitation 9 on their liability for intentional misrepresentations, this argument is not well taken. “A 10 party to a contract who has been guilty of fraud in its inducement cannot absolve himself 11 or herself from the effects of his or her fraud by any stipulation in the contract . . . .” 12 McClain v. Octagon Plaza, LLC, 159 Cal. App. 4th 784, 794 (2008). Thus, even if the 13 prefatory statement contained stronger language explicitly stating that the Article 7 14 representations were meant to induce only Creative Holdings’s acceptance of the APA, 15 and not Flavor Producers’s acceptance of the APA, such a disclaimer would be 16 ineffective at limiting Fischler’s and Kapel’s liability to Flavor Producers. See Cal. Civ. 17 Code § 1668 (“All contracts which have for their object, directly or indirectly, to exempt 18 anyone from responsibility for his own fraud, . . . whether willful or negligent, are 19 against the policy of the law.”). 20 Fischler and Kapel argue that the prefatory statement constitutes evidence that 21 any intent to defraud was directed at Creative Holdings and not at Flavor Producers. 22 (See Reply 7–8.) But Flavor Producers alleges facts making it plausible that Fischler 23 and Kapel intended to defraud Flavor Producers, too. Flavor Producers alleges that 24 Fischler and Kapel, the controlling shareholders and operators of CFC, made several 25 written misrepresentations in agreeing to sell CFC assets to both Creative Holdings and 26 Flavor Producers. (Countercl. ¶¶ 36–45; see generally APA.) These 27 misrepresentations tended to overrepresent the value of CFC, and it is plausible that 28

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1 Fischler and Kapel intended that Flavor Producers, who was also buying CFC assets, 2 would rely on the misrepresentations as well. (See Countercl. ¶¶ 69–75, 78.) 3 Finally, Fischler and Kapel argue that Flavor Producers has failed to plead 4 justifiable reliance. (See Mot. 8–9.) They claim that because any misrepresentations in 5 Article 7 were made to Creative Holdings, Flavor Producers was not justified in relying 6 on them. However, reading the allegations in a light most favorable to Flavor 7 Producers, it is clear that Flavor Producers, as a signatory to the APA, could have 8 reasonably relied on all the statements in the APA, including those expressly designated 9 as made to induce Creative Holdings’s acceptance. 10 Accordingly, the Motion is DENIED as to Flavor Producers’s first counterclaim. 11 B. Breach of Representations and Warranties 12 Flavor Producers’s second claim is for breach of contract. Flavor Producers 13 alleges that Fischler and Kapel breached certain representations and warranties in the 14 APA which ultimately led to damages arising from the TruYou litigation. (Countercl. 15 ¶ 89.) To plead a claim for breach of contract, a plaintiff must allege (1) the existence 16 of a contract, (2) the plaintiff’s performance or excuse for nonperformance, (3) the 17 defendant’s breach, and (4) resulting damages to the plaintiff. Oasis W. Realty, LLC v. 18 Goldman, 51 Cal. 4th 811, 821 (2011). 19 Flavor Producers satisfies these requirements. First, Flavor Producers bases its 20 claim on the APA, a contract that Flavor Producers, Fischler, Kapel, CFC, and Creative 21 Holdings entered into in April 2017. (Countercl. ¶ 83.) Second, Flavor Producers 22 details its performance under the contract. (See id. ¶¶ 50, 84.) Third, section 7.3 of the 23 APA represented that neither Fischler nor Kapel had knowledge of any facts that would 24 provide the basis for a lawsuit that could, if adversely decided, have a material adverse 25 effect on CFC. (Id. ¶ 85; APA 18.) Flavor Producers alleges that Fischler and Kapel 26 breached this portion of the contract because they did, in fact, have knowledge of an 27 imminent action by TruYou against CFC based on CFC’s breach of the TruYou 28 Agreement. (Countercl. ¶ 86.) Finally, Flavor Producers claims that it incurred

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1 substantial costs defending and ultimately settling an unanticipated lawsuit by TruYou. 2 (Id. ¶¶ 87–89.) These allegations state a plausible claim. 3 Fischler and Kapel again point to the prefatory statement in Article 7 of the APA 4 to argue that section 7.3 applies only to Creative Holdings and not to Flavor Producers. 5 (See Mot. 9.) Their argument remains unpersuasive. Fischler’s and Kapel’s designation 6 of certain contractual obligations “[a]s an inducement to [Creative Holdings] to enter 7 this Agreement” does not invalidate Flavor Producers’s right to sue for breach of 8 contract when those obligations were not met. It is at least plausible that the obligations 9 in section 7.3 are owed to both Creative Holdings and Flavor Producers.3 10 Accordingly, the Motion is DENIED as to Flavor Producers’s second 11 counterclaim. 12 C. Breach of the Indemnification Provisions of the APA 13 Flavor Producers’s third claim also sounds in contract. Flavor Producers alleges 14 that Fischler and Kapel breached section 14.1(a)–(c) of the APA when they refused to 15 indemnify Flavor Producers for the costs it incurred defending and settling the TruYou 16 Litigation. (Countercl. ¶¶ 95–99.) 17 Sections 14.1(b) and (c) require that Fischler and Kapel indemnify Flavor 18 Producers and Creative Holdings for all of CFC’s liabilities and contingent liabilities 19 existing at the time the APA was executed. (APA 39.) Moreover, Flavor Producers 20 alleges that “CFC breached the TruYou-CFC Agreement in December of 2016 by 21 selling products to Interush without making the required payments to TruYou.” 22 (Countercl. ¶ 58.) Assuming this allegation to be true, TruYou’s claims against CFC 23 had accrued by the closing of the APA, and it is plausible that these claims constitute 24 “liabilities” or “contingent liabilities” as those terms are used in sections 14.1(b) and 25

26 3 Fischler’s and Kapel’s assertion that Article 7 applies only to Creative Holdings and not to Flavor Producers is further undermined by the fact that Article 7 elsewhere references “Buyer Parties,” i.e., 27 Creative Holdings and Flavor Producers. (See APA 17–18 (“The Buyer Parties acknowledge . . . .”; 28 “The Buyer Parties understand . . . .”; “The Buyer Parties further acknowledge . . . .; “Buyer Parties understand and agree . . . .”).)

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1 || (c). Therefore, Flavor Producers adequately pleads a claim for indemnity based on 2 || section 14.1 of the APA. The Motion is DENIED as to Flavor Producers’s third 3 || counterclaim. 4] D. Violation of California’s Unfair Competition Law 5 The California Unfair Competition Law (“UCL”) prohibits unlawful, unfair, or 6 || fraudulent business acts or practices. Cal. Bus. & Prof. Code § 17200. Fischler and 7|| Kapel argue that Flavor Producers fails to allege facts showing unlawful or unfair 8 | behavior, and that, to the extent it attempts to allege fraud, those allegations are 9 || insufficient. (Mot. 8.) Here, however, the facts that Flavor Producers alleges in support 10 || of its fraudulent inducement claim are sufficient to support its UCL claim based on 11 || fraudulent business practices. Cf Fairbanks v. Farmers New World Life Ins. Co., 12 | 197 Cal. App. 4th 544, 561 (2011) (“[T]he elements a plaintiff must prove to establish 13 | a fraudulent business practices cause of action under the UCL are more favorable to 14 || plaintiffs than those for common law fraudulent inducement... .”). The UCL claim is 15 || therefore sufficient on the “fraudulent” prong and will not be dismissed. The Motion is 16 | DENIED as to Flavor Producers’s fourth counterclaim. 17 Vv. CONCLUSION 18 For these reasons, Fischler’s and Kapel’s Motion to Dismiss Counterclaims is 19 | DENIED. (ECF No. 85.) 20 21 IT IS SO ORDERED. 22 23 February 4, 2022 NN . 24 NG. 25 Lidia 6 OTIS D. HT, I 7 UNITED STATES DISTRICT JUDGE