Law Offices of Douglas S. Honig and Douglas Honig for Plaintiff and Appellant. Estelle & Kennedy, Michael L. Kennedy and Danielle K. Little for Defendant and Respondent.
ORDER MODIFYING OPINION AND DENYING PETITION FOR REHEARING; NO CHANGE IN JUDGMENT
It is hereby ordered that the opinion filed on January 17, 2018, be modified as follows:
At the end of the third full paragraph on page 14, before the heading "DISPOSITION" add as footnote 5 the following footnote:
"5In a petition for rehearing, defendant asserts for the first time that the trial court lacked personal jurisdiction over him. This argument was never previously made, on appeal or below, and we easily dispose of it. The court obtained personal jurisdiction over defendant when he first demurred to plaintiff's complaint and did
not object to personal jurisdiction. (§ 418.10, subd. (e)(3); Roy v. Superior Court (2005) 127 Cal.App.4th 337, 344-345.)"
There is no change in the judgment.
The petition for rehearing is DENIED.
IKOLA, J. WE CONCUR: O'LEARY, P. J. FYBEL, J.
NOT TO BE PUBLISHED IN OFFICIAL REPORTS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 This opinion has not been certified for publication or ordered published for purposes of rule 8.1115. (Super. Ct. No. 30-2015-00785669) OPINION Appeal from a judgment of the Superior Court of Orange County, Theodore R. Howard, Judge. Reversed. Law Offices of Douglas S. Honig and Douglas Honig for Plaintiff and Appellant. Estelle & Kennedy, Michael L. Kennedy and Danielle K. Little for Defendant and Respondent.
Seeking to recover approximately half a million dollars loaned to Defendant Mohamed Abouelmagd, Plaintiff Debra Newell appeals from a judgment dismissing her second amended complaint after the court sustained defendant's demurrer without leave to amend. The court concluded her claims were barred by the applicable statutes of limitation. In doing so, the court rejected plaintiff's assertions that the statutes of limitation had been tolled during defendant's absence from the state, and that defendant should be estopped from asserting the limitation period as a defense.
Plaintiff contends the trial court erred in two respects. First, she claims the court wrongly concluded that tolling under Code of Civil Procedure section 351 would be unconstitutional under the dormant commerce clause of the United States Constitution. (U.S. Const., art. I, § 8, cl. 3.; commerce clause.) Second, she claims the court erroneously concluded she did not plead sufficient facts to estop defendant from asserting a statute of limitation defense. We conclude application of section 351 under the circumstances of this case would not violate the dormant commerce clause, and, thus, we reverse the judgment of dismissal. In light of our disposition, we do not reach the estoppel issue.
All further statutory references are to the Code of Civil Procedure unless otherwise stated.
The following facts are taken from the allegations and exhibits in the operative complaint at the time of the demurer.
Plaintiff, a California resident, and defendant, a New York and/or New Jersey resident, met in Las Vegas. He represented to her he was not married, which later proved to be false, and they became romantically involved. Because of their intimate relationship, when defendant encountered financial hardship in mid-1999, plaintiff orally agreed to loan him money. Defendant orally agreed to repay plaintiff the amount borrowed, without interest. Over the course of the following year, plaintiff continued periodically to loan defendant additional sums of money. By September 2000, the loans to defendant totaled nearly $700,000.
Although plaintiff allegedly did not care how defendant would use the money, defendant expressed to her that he intended to use it for a combination of personal and business expenses. In one of the many "love letters" written by defendant to plaintiff after she had loaned him the majority of the money, he indicated one proposal he could offer her was to give her half of the shares he owned in his businesses. He also stated that if he were to be successful in his business, he would "reward" her with the original money borrowed and a high percentage of interest.
After repaying plaintiff a small portion of what was owed, defendant executed a written promissory note in plaintiff's favor. In it he acknowledged he had borrowed money from her for personal and business reasons, he indicated the outstanding debt was $490,000, and he promised he would pay her $20,000 per month until the remaining debt was paid in full.
Following the terrorist attacks of September 11, 2001, defendant expressed concern he would be subject to harassment and retaliation based on his Egyptian nationality. He told plaintiff he planned to move back to Egypt, permanently, but he would continue to repay her from there. She believed him.
Defendant did not follow through on his promises. After paying back about $85,000 of the money borrowed, with the last payment having occurred in April 2002, defendant disappeared. Between 2004 and 2008, Plaintiff traveled to New York twice, and Egypt once, to try to locate defendant based on information he had given to her. She was unsuccessful.
In January 2015, plaintiff learned defendant had not permanently moved to Egypt; he was living in New York and/or New Jersey. She filed a lawsuit against him, alleging breach of an oral and a written contract, a common count of indebtedness and fraud.
Defendant demurred to the complaint based, in part, on statute of limitation grounds. Plaintiff opposed the demurrer, arguing the applicable statutes of limitation had been tolled, pursuant to section 351, until defendant appeared in the case because he had never previously been present in California. In response, defendant contended tolling of the statutes of limitation would be unconstitutional under the circumstances. Relying on the United States Supreme Court's decision in Bendix Autolite Corp. v. Midwesco Enterprises (1988) 486 U.S. 888 (Bendix), and the Ninth Circuit Court of Appeals' decision in Abramson v. Brownstein (9th Cir. 1990) 897 F.2d 389 (Abramson), defendant argued application of the tolling statute would violate the dormant commerce clause because it would unwarrantedly impede interstate commerce.
The trial court sustained the demurrer and granted plaintiff leave to amend the complaint.
Plaintiff filed a first amended complaint containing modified allegations about the circumstances surrounding the loans. While in the original complaint plaintiff alleged she loaned defendant "certain sums of money . . . which would be used as an investment in his business," the amended allegations stated plaintiff made the loan "because she had a personal, intimate relationship with [d]efendant." It further stated she did not lend the money in order to profit from it, and she "was not in the business of lending money."
Defendant filed a second demurrer based on the same statute of limitation and dormant commerce clause arguments. The trial court once again sustained the demurrer with leave to amend. In doing so, it expressed concern that plaintiff's modified allegations appeared inconsistent with those in the original complaint concerning the "investment" nature of the loan, and plaintiff had provided no explanation for the shift.
After plaintiff filed a second amended complaint, which included more detail and an explanation for the changes made since the original complaint, defendant demurred again based on the same arguments. The trial court sustained the demurrer, but this time without leave to amend. Citing Dan Clark Family Limited Partnership v. Miramontes (2011) 193 Cal.App.4th 219 (Dan Clark), it concluded application of section 351 in this case would be an unconstitutional burden on interstate commerce irrespective of whether the underlying transaction was "commercial" or "personal" in nature because it would force defendant to be present in California for the statutory period in order to avoid being subjected to potential liability "'in perpetuity.'" It determined this burden on interstate commerce "outweighs the burden on a plaintiff in having to pursue an out-of-state defendant." The court also rejected the application of equitable estoppel, noting plaintiff did not identify what defendant did that she reasonably relied upon in deciding to not file a lawsuit sooner.
Plaintiff timely appealed following entry of judgment dismissing the case.
Plaintiff claims the court erred in finding section 351 unconstitutional as applied to this case and in rejecting the application of equitable estoppel. In making these arguments, she asserts the court erroneously made factual determinations rather than assuming the facts in the complaint were true as it is required to do when ruling on a demurrer. As we shall explain, the trial court incorrectly concluded on demurrer that application of section 351's tolling provision would violate the dormant commerce clause.
"When reviewing a judgment dismissing a complaint after the [sustaining] of a demurrer without leave to amend, courts must assume the truth of the complaint's properly pleaded or implied factual allegations. [Citation.] . . . [Citation.] . . . [W]e give the complaint a reasonable interpretation, and read it in context." (Schifando v. City of Los Angeles (2003) 31 Cal.4th 1074, 1081.) "'A demurrer on the ground of the bar of the statute of limitations will not lie where the action may be, but is not necessarily barred.' [Citations.] It must appear clearly and affirmatively that, upon the face of the complaint, the right of action is necessarily barred. [Citations.] This will not be the case unless the complaint alleges every fact which the defendant would be required to prove if he were to plead the bar of the applicable statute of limitation as an affirmative defense." (Lockley v. Law Office of Cantrell, Green, Pekich, Cruz & McCort (2001) 91 Cal.App.4th 875, 881.)
We apply a de novo standard of review to the question of whether section 351 is unconstitutional as applied in this case (U.D. Registry, Inc. v. State of California (2006) 144 Cal.App.4th 405, 418), as well as to the question of whether plaintiff sufficiently pleaded the elements of an estoppel. (Blake v. Wernette (1976) 57 Cal.App.3d 656, 660 (Blake).)
"The Commerce Clause dictates that 'Congress shall have Power . . . [t]o regulate Commerce . . . among the several States.' [Citation.] 'Though phrased as a grant of regulatory power to Congress, the Clause has long been understood to have a "negative" aspect that denies the States the power unjustifiably to discriminate against or burden the interstate flow of articles of commerce.'" (Pharmaceutical Research & MFRS. v. Alameda County (2014) 768 F.3d 1037, 1041.) This aspect, which has become commonly known as the dormant commerce clause, "'is driven by concern about economic protectionism[,] that is, regulatory measures designed to benefit in-state economic interests by burdening out-of-state competitors.'" (Ibid.)
Analysis under the dormant commerce clause consists of two steps. The first is to determine whether the law at issue "'regulates evenhandedly with only "incidental" effects on interstate commerce,'" or whether it "'discriminates against interstate commerce.'" (Oregon Waste Systems v. Dept. of Env. Quality (1994) 511 U.S. 93, 99 (Oregon Waste).) "'[D]iscrimination' simply means differential treatment of in-state and out-of-state economic interests that benefits the former and burdens the latter." (Ibid.)
The second step is dependent on the outcome of the first. If the law is discriminatory, it is virtually per se invalid. (Oregon Waste, supra, 511 U.S. at p. 99.) In order to avoid invalidation, its proponents must "'"sho[w] that it advances a legitimate local purpose that cannot be adequately served by reasonable nondiscriminatory alternatives."'" (Jordan v. Dept. of Motor Vehicles (1999) 75 Cal.App.4th 449, 460, citing Oregon Waste, supra, 511 U.S. 93.) If a law is not discriminatory, but instead only has incidental effects on interstate commerce, it is "valid unless 'the burden imposed on such commerce is clearly excessive in relation to the putative local benefits.'" (Oregon Waste, supra, 511 U.S. at p. 99.)
Turning to section 351, it is a tolling statute that extends the time in which to file suit under two circumstances: (1) if the defendant was outside California when the action accrued, or (2) if the defendant left the state, temporarily or permanently, after it accrued. In these two situations, the time during which the defendant is absent from the state is not counted for statute of limitation purposes. (Green v. Zissis (1992) 5 Cal.App.4th 1219, 1222.) Section 351 applies equally to resident defendants who leave the state and defendants who have not previously been to California. (Kohan v. Cohan (1988) 204 Cal.App.3d 915, 920-921.)
Section 351 provides in full: "If, when the cause of action accrues against a person, he is out of the State, the action may be commenced within the term herein limited, after his return to the State, and if, after the cause of action accrues, he departs from the State, the time of his absence is not part of the time limited for the commencement of the action."
Although section 351 has been constitutionally applied, there are a limited number of cases in which it has been found unconstitutional as applied based on the dormant commerce clause. (See, e.g., Dan Clark, supra, 193 Cal.App.4th 219; Heritage Marketing & Ins. Services., Inc. v. Chrustawka (2008) 160 Cal.App.4th 754 (Heritage Marketing); Abramson, supra, 897 F.2d 389.) The reasoning in each case stems from the United States Supreme Court's decision in Bendix, supra, 486 U.S. 888.
In Bendix, the court considered whether an Ohio tolling statute similar to section 351 violated the dormant commerce clause. (Bendix, supra, 486 U.S. at pp. 889-890.) The defendant, an out-of-state corporation, had delivered and installed a boiler system at the plaintiff's facility in Ohio. (Id. at p. 890) When the boiler did not perform as expected, the plaintiff filed suit, claiming it had been incorrectly installed and it was not of the quality specified in their contract. (Ibid.) The defendant asserted a statute of limitation defense, to which the plaintiff responded by attempting to invoke the tolling statute. (Ibid.)
Because the Ohio tolling statute had the effect of denying "ordinary legal defenses . . . to out-of-state persons or corporations engaged in commerce," the court reviewed the law "under the Commerce Clause to determine whether the denial [was] discriminatory on its face or an impermissible burden on commerce." (Bendix, supra, 486 U.S. at p. 893.) In concluding the latter was true under the facts before it, the court weighed the relative burdens on interstate commerce and on a plaintiff of serving an out-of-state defendant. It recognized foreign defendants may often be more difficult to serve, but also noted all parties had conceded the Bendix defendant could have been served throughout the limitation period under Ohio's long-arm statute. (Id. at p. 894.) The Court concluded such an inconvenience to the plaintiff was outweighed by the burden on an out-of-state corporation to either somehow become "present" in Ohio or be unable to assert the statute of limitation defense that a resident corporation could. (Id. at pp. 894-895.) Accordingly, the law was deemed unconstitutional as applied to the facts of the case. (Id. at p. 889.)
A couple of years after Bendix, the Ninth Circuit Court employed a similar analysis and held section 351 unconstitutional as applied. (Abramson, supra, 897 F.2d at p. 392.) Abramson involved two California residents, a partnership and its general partner, who had negotiated over the phone to purchase gold coins and currency from a Massachusetts resident. (Id. at p. 390.) Although paid in full, the Massachusetts resident never completely fulfilled his part of the contract. (Ibid.) The California residents sued, and the timeliness of the lawsuit hinged on whether section 351 could constitutionally be applied to toll the statute of limitation. (Id. at p. 391.)
Because the defendant was "engaged in interstate commerce when . . . he entered into [the] sales transaction with [the California plaintiffs,]" and because the Ninth Circuit found section 351 to be nondiscrimintory, the court "'weigh[ed] andassess[ed] the State's putative interests against the interstate [commerce] restraints to determine if the burden imposed [was] an unreasonable one.'" (Abramson, supra, 897 F.2d at p. 392.) As in Bendix, the facts demonstrated the defendant could have been served under the state's long-arm statute throughout the limitation period. (Abramson, at p. 393.) The court concluded this was outweighed by the "significant burden" section 351 imposed on the defendant who was engaged in interstate commerce—either be present in California for several years or forfeit the statute of limitation defense and be subject to potential liability in perpetuity. (Id. at p. 392.)
See Mounts v. Uyeda (1991) 227 Cal.App.3d 111, 121 ["Abramson does not declare . . . section 351 facially unconstitutional. 'On its face, California's tolling statute is non-discriminating because it treats alike residents and nonresidents of California.'"].) --------
Application of section 351 in a different factual scenario occurred in Filet Menu, Inc. v. Cheng (1999) 71 Cal.App.4th 1276 (Filet Menu). Claiming a breach of contract related to the sale of restaurant related items, a California resident plaintiff sued the defendants, one of which was a California resident. (Id. at pp. 1278-1279.) The California defendant demurred to the complaint on statute of limitation grounds, and the plaintiff argued section 351 applied to toll the limitation period during times the California defendant was temporarily out of state. (Id. at p. 1280.)
Because the underlying transaction involved commerce, the court assessed the as applied constitutionality of section 351 under the dormant commerce clause. (Filet Menu, supra, 71 Cal.App.4th at pp. 1281-1283.) It concluded the statute would be unconstitutional if applied to a resident travelling out of state "for the facilitation of interstate commerce" (e.g., in course of employment, to search for a job). (Id. at p. 1283.) The court also expressly stated that when out of state travel is for purposes unrelated to interstate commerce, application of the statute would not violate the commerce clause. (Ibid., citing Pratali v. Gates (1992) 4 Cal.App.4th 632, 635. (Pratali).) However, because the complaint did not allege why the California defendant had been absent from the state, the court concluded the demurrer should not have been sustained. (Id. at p. 1284.)
Years later, a different panel of this court considered application of section 351 to California residents who permanently move out of the state. (Heritage Marketing, supra, 160 Cal.App.4th at p. 761.) The plaintiff, an insurance company that provided living trust services, sued one former employee and two others for, inter alia, breach of contract, conspiracy to defraud, defamation and slander per se. (Id. at pp. 757-758.) The complaint alleged the defendants had moved to Texas and shortly thereafter opened a business which competed with the plaintiff's. (Id. at p. 758.) In answering the key question of "whether the undisputed facts show defendants' conduct sufficiently made an impact on interstate commerce to invoke the commerce clause," (id. at p. 761) we explained that the movement of people, like the defendants, across state lines falls within the scope of "interstate commerce." (Id. at pp. 761 & 763.) We ultimately concluded section 351's burden on such interstate commerce was impermissible under the facts of the case because the defendants would be forced either to "remain residents of California until the limitations period expired or mov[e] out of state and [forfeit] the limitations defense . . . ." (Id. at p. 764.)
A similar conclusion was reached in Dan Clark, a case arising from an alleged botched sale of commercial vehicles to the plaintiff, a limited partnership domiciled in Texas. (Dan Clark, supra, 193 Cal.App.4th at pp. 222-223.) The complaint alleged the plaintiff purchased and paid for vehicles which were never delivered to him by a California seller, the defendants ended up purchasing the same vehicles from the same seller, the transaction took place in Nevada, the defendants knew at the time of purchase that the seller did not own the vehicles, and the defendants thereafter actively concealed their purchase from the plaintiff. (Id. at p. 224.) Because the defendants had allegedly moved to Mexico for personal reasons after purchasing the vehicles, the plaintiff argued section 351 tolled the statute during the time they were absent from the state. (Id. at p. 225.)
At the outset, the appellate court explained that an analysis under the dormant commerce clause was necessary because the transaction giving rise to the lawsuit (i.e. purchase and sale of vehicles) was an interstate commercial transaction. (Dan Clark, supra, 193 Cal.App.4th at p. 232.) Then, relying on Bendix and Abramson, the court concluded section 351 was unconstitutional as applied to the facts of the case. It explained that "[a]lthough application of section 351 would not affect the [defendants] in terms of forcing them to choose between remaining residents of California or being subject to suit in perpetuity, it would essentially force them to either become residents of California or to be subject to suit in California in perpetuity." (Id. at p. 233.) The court found such a burden untenable. (Ibid.)
Defendant argued below, and continues to urge on appeal, that the facts of this case are similar to those of the cases described above and, therefore, plaintiff should not be permitted to resort to section 351 because its application would be unconstitutional. But, before reaching the two-step dormant commerce clause analysis, we must first determine whether the commerce clause is even implicated by the facts of this case. (Bendix, supra, 486 U.S. at p. 893 ["Where a State denies ordinary legal defenses or like privileges to out-of-state persons or corporations engaged in commerce, the state law will be reviewed under the Commerce Clause to determine whether the denial is discriminatory on its face or an impermissible burden on commerce," italics added]; Knappenberger v. Davis-Stanton (Or.Ct.App. 2015) 351 P.3d 54, 62 ["The threshold question to be resolved, however, is whether defendant is an out-of-state person engaged in commerce for purposes of the Commerce Clause"]; Tesar v. Hallas (N.D. Ohio 1990) 738 F.Supp. 240, 241-242 ["threshold question" is whether person "can be deemed, in commerce clause terms, to be or to have been 'engaged in commerce'"].) It is on this point we find plaintiff's argument persuasive.
It is well-established the formation of a contract between persons in different states is not within the protection of the commerce clause unless the performance of the contract falls within its protection. (Western Live Stock v. Bureau of Revenue (1938) 303 U.S. 250, 253.) To do so, performance of the contract must implicate interstate commerce. Though even the United States Supreme Court acknowledges the lack of a precise definition for "interstate commerce" (U.S. v. Lopez (1995) 514 U.S. 549, 552-559 [detailing evolution of commerce clause jurisprudence]), its decisions have articulated three categories falling within its scope: (1) the channels of interstate commerce; (2) the instrumentalities of interstate commerce, and persons or things in interstate commerce; and (3) activities that "substantially affect" interstate commerce. (U.S. v. Morrison (2000) 529 U.S. 598, 608-609 (Morrison).)
Thus, the critical question is whether performance of the loan contracts alleged in the complaint constitutes or implicates one of the three categories of interstate commerce. We conclude it does not.
Pratali is instructive. While in Las Vegas, the plaintiff loaned money to the defendant, who executed a promissory note. (Pratali, supra, 4 Cal.App.4th at p. 635.) At the time, both were California residents. (Id. at p. 643.) When the note failed to be paid, the plaintiff sued and obtained a monetary judgment against the defendant. (Id. at p. 635.) Thereafter, the defendant moved to Idaho, and years later, the plaintiff filed a separate action to collect on the judgment. (Id. at pp. 635-636.) The defendant argued the suit was barred by the statute of limitation, to which the plaintiff responded by asserting tolling pursuant to section 351. (Id. at p. 638.)
On appeal, the court rejected the defendant's contention that application of section 351 would violate the dormant commerce clause. (Pratali, supra, 4 Cal.App.4th at p. 643.) In doing so, it explained "there [were] insufficient circumstances impacting on interstate commerce to invoke the commerce [clause]." (Ibid.) The record lacked evidence the plaintiff "was in the business of making loans or was otherwise engaged in commerce," and lacked evidence as to how the loaned money was used. (Ibid.) As to the latter, the court "question[ed] whether a single amicable loan between California acquaintances while visiting in Las Vegas can rise to the level of interstate commerce within the meaning of the commerce clause—however the proceeds are used." (Ibid.)
Here, the second amended complaint alleges plaintiff loaned defendant money because she "had a personal, intimate relationship with [him]." The letters attached to the complaint, which defendant purportedly wrote, support such an allegation. The complaint further alleges she "was not in the business of lending money," and she made the loan without any expectation of profiting from it. As in Pratali, we are not dealing here with the channels or instrumentalities of interstate commerce, persons or things in interstate commerce, or activities that "substantially affect" interstate commerce. (See Morrison, supra, 529 U.S. at pp. 608-609.)
Defendant asserts the complaint's allegations "make clear" the loan was made, at least in part, for business investment purposes. Although certain allegations in the operative complaint mention use of some of the loaned money for business purposes, those allegations, as well as the letters from defendant attached to the complaint, indicate it was defendant who mentioned he would use some of the money in that manner. Defendant provides no authority such statements, which are alleged to have been made after plaintiff loaned the money, somehow turn the transaction into one involving or substantially affecting interstate commerce.
We are equally unconvinced by defendant's claim that interstate commerce is implicated because plaintiff sent some of the loaned money across state lines to where defendant was located, or because the few repayments defendant made to plaintiff were done via mail or wire transfer. (See New York L. Ins. Co. v. Deer Lodge County (1913) 231 U.S. 495, 509-510 ["That they may live in different states and hence use the mails for their communications does not give character to what they do; cannot make a personal contract the transportation of commodities from one state to another"].)
Because we conclude the allegations in the operative complaint do not establish defendant was an "out-of-state person . . . engaged in [interstate] commerce" (Bendix, supra, 486 U.S. at p. 893), the dormant commerce clause is not implicated and we do not reach the two-step analysis thereunder.
The judgment of dismissal is reversed. The court is directed to vacate its order sustaining the demurrer to the second amended complaint and to issue a new order overruling defendant's demurrer to the second amended complaint. Plaintiff shall recover costs incurred on appeal.
IKOLA, J. WE CONCUR: O'LEARY, P. J. FYBEL, J.