Dhital v. Nissan North America, Inc.Dhital v. Nissan North America, Inc.
Plaintiffs Sobita Dhital and Daniel Newman sued defendant Nissan North America, Inc. (Nissan), alleging the transmission in a 2013 Nissan Sentra they purchased was defective. In their operative second amended complaint (SAC), plaintiffs asserted statutory claims under the Song-Beverly Consumer Warranty Act (Song-Beverly Act) (
The trial court sustained Nissan‘s demurrer to the fraudulent inducement claim (the fourth cause of action in the SAC) without leave to amend, holding the claim was barred by the “economic loss rule” discussed in Robinson Helicopter Co., Inc. v. Dana Corp. (2004) 34 Cal.4th 979 (Robinson). The court also granted an accompanying motion to strike plaintiffs’ request for punitive damages. Plaintiffs dismissed their remaining claims with prejudice, and the court entered judgment for Nissan.
Plaintiffs appeal, contending the court erred by applying the economic loss rule to bar their fraudulent inducement claim. Nissan argues the court
We conclude that, under California law, the economic loss rule does not bar plaintiffs’ fraudulent inducement claim. We also reject Nissan‘s argument that plaintiffs did not adequately plead a claim for fraudulent inducement. We therefore reverse the judgment entered in favor of Nissan and remand for further proceedings on plaintiffs’ fraudulent inducement claim.1
I. BACKGROUND
A. The SAC: Plaintiffs’ Allegations About the Allegedly Defective Transmission and Nissan‘s Alleged Fraud
“Because this matter comes to us after the trial court sustained the defendant‘s demurrer, ‘we must, under established principles, assume the truth of all properly pleaded material allegations of the complaint in evaluating the validity’ of the decision below.” (Lazar v. Superior Court (1996) 12 Cal.4th 631, 635.)
In the SAC, plaintiffs alleged that, on November 4, 2012, they purchased a new 2013 Nissan Sentra from a Nissan dealership in San Leandro. On three occasions in 2015, plaintiffs took the car to an authorized Nissan repair facility because of transmission problems, including stalling, jerking, and lack of power. They eventually decided to stop using the car due to their concern it posed a risk to their safety and the safety of others, because “[u]ncertain and unpredictable performance of a vehicle‘s engine and transmission can result in sudden and unexpected movements or stalling that greatly increase the risk of a motor vehicle accident.”
Plaintiffs alleged Nissan manufactured or distributed more than 500,000 vehicles in the United States that were equipped with defective continuously variable transmissions (CVT‘s), including plaintiffs’ Sentra and other Sentras for model years 2013 through 2017. The SAC alleged: “The CVT is defective in that it causes hesitation from a stop before acceleration; sudden, hard shaking during deceleration; sudden, hard shaking and violent jerking (commonly known as ‘juddering’ or ‘shuddering‘) during acceleration; and complete failure to function, each and all of which prevent a CVT-equipped
As to Nissan‘s knowledge that the transmissions were defective, plaintiffs alleged in part that Nissan “knew or should have known about the safety hazard posed by the defective transmissions before the sale of CVT-equipped vehicles from premarket testing, consumer complaints to the National Highway Traffic Safety Administration (‘NHTSA‘), consumer complaints made directly to Nissan and its dealers, and other sources which drove Nissan to issue Technical Service Bulletins acknowledging the transmission‘s defect. Nissan should not have sold, leased, or marketed the CVT-equipped vehicles without a full and complete disclosure of the transmission defect, and should have voluntarily recalled all CVT-equipped vehicles long ago.”
In their statutory claims under the Song-Beverly Act (the first, second, and third causes of action in the SAC), plaintiffs alleged Nissan breached express and implied warranties and failed to repair the car within a reasonable period of time. In the common law fraud claim that is at issue in this appeal (the SAC‘s fourth cause of action, entitled “Fraudulent Inducement—Concealment“), plaintiffs alleged in part that “[Nissan] and its agents intentionally concealed and failed to disclose facts relating to the defective transmission“; Nissan had exclusive knowledge of the defect and did not disclose that information to plaintiffs; “Nissan intended to deceive [plaintiffs] by concealing the known issues with the CVT transmission in an effort to sell the [car] at a maximum price“; “[Nissan] fraudulently induced [plaintiffs] to enter into a contract they would not have entered into but for [Nissan‘s] concealment of the defective nature of the CVT transmission“; if plaintiffs had known of the defect, they would not have purchased the car; and plaintiffs suffered damages in the form of money paid to purchase the car.
Plaintiffs alleged the defect and the resulting “[u]ncertain and unpredictable performance” of the transmission increased the risk of an accident and thus placed them at risk of physical harm. But as the trial court later noted, plaintiffs did not allege the defect caused any personal injury or any damage to property other than the car.
In the SAC‘s prayer for relief, plaintiffs sought special and actual damages, rescission of the purchase contract and restitution of all amounts paid,
B. Procedural Background
Prior to the filing of the SAC, the court (Hon. Jo-Lynne Q. Lee) (1) sustained, with leave to amend, Nissan‘s demurrers to the claims for fraudulent inducement—concealment in plaintiffs’ original and first amended complaints, and (2) granted, also with leave to amend, Nissan‘s motion to strike the punitive damages requests in those complaints.
In its demurrer to the fraud claim in plaintiffs’ original complaint, Nissan did not contend the economic loss rule barred the claim, arguing on other grounds that plaintiffs had not stated a cause of action. But the trial court requested supplemental briefing on the economic loss rule and sustained the demurrer (with leave to amend) on the basis of that rule, concluding in part that “[t]he only injury identified by Plaintiffs is that they have purchase[d] a vehicle they would not have otherwise bought if they knew of its alleged defects. Such an injury is insufficient to overcome the economic loss rule.”
In its order addressing Nissan‘s motion to strike portions of plaintiffs’ original complaint, the court declined to strike certain passages throughout the complaint that Nissan had alleged were irrelevant, but granted the motion (with leave to amend) as to the punitive damages allegations. The court concluded the complaint did not include sufficient allegations to support a claim for punitive damages against a corporation, stating “the allegations in the Complaint are insufficient to establish that ‘the advance knowledge and conscious disregard, authorization, ratification or act of oppression, fraud, or malice [is] on the part of an officer, director, or managing agent of the corporation.’ ([
Plaintiffs filed the SAC in January 2020. Nissan again demurred to the claim for fraudulent inducement—concealment (the fourth cause of action in the SAC) and moved to strike portions of the SAC, including the punitive damages allegations. In its demurrer, Nissan argued plaintiffs’ fraud claim was barred by the economic loss rule and was not pleaded with sufficient specificity. Nissan contended in its motion to strike that the SAC‘s allegations supporting corporate liability for punitive damages were still insufficient, and that plaintiffs had not adequately pleaded a fraud claim that would support an award of punitive damages. A hearing on the demurrer and the motion to strike was set for May 2020, but the matter was taken under submission without hearing because plaintiffs did not contest the tentative ruling against them.
The court (Hon. Richard Seabolt) sustained the demurrer to the fraud cause of action, this time without leave to amend. The court held the fraud claim
The court also granted, without leave to amend, the motion to strike the punitive damages allegations. It reasoned that plaintiffs do not have a viable fraud claim that would support an award of punitive damages, and that such damages are not an available remedy for plaintiffs’ remaining claims under the Song-Beverly Act. It also explained that the FAC‘S allegations remained insufficient to establish ratification by a senior corporate official as required to support a claim for punitive damages against a corporation (
Following the court‘s ruling, plaintiffs dismissed their remaining claims with prejudice, and the court entered judgment for Nissan in April 2021. Plaintiffs appealed.
II. DISCUSSION
A. Standard of Review
“‘In reviewing an order sustaining a demurrer, we examine the operative complaint de novo to determine whether it alleges facts sufficient to state a cause of action under any legal theory.’ [Citation.] ‘ ” ‘We treat the demurrer as admitting all material facts properly pleaded, but not contentions, deductions or conclusions of fact or law. . . . We also consider matters which may be judicially noticed.” . . . Further, we give the complaint a reasonable interpretation, reading it as a whole and its parts in their context.” ‘ ” (Mathews v. Becerra (2019) 8 Cal.5th 756, 768.) “‘In considering a trial court‘s order sustaining a demurrer without leave to amend, “we review the trial court‘s result for error, and not its legal reasoning.” ‘ [Citation.] We ‘ “affirm the judgment if it is correct on any theory.” ‘ ” (Munoz v. Patel (2022) 81 Cal.App.5th 761, 771.)
Similarly, “[t]he standard of review for an order on a motion to strike punitive damages allegations is de novo. [Citation.] ‘In passing on the correctness of a ruling on a motion to strike, judges read allegations of a
We review the court‘s denial of leave to amend for abuse of discretion. (Schifando v. City of Los Angeles (2003) 31 Cal.4th 1074, 1081.) “[W]e must decide whether there is a reasonable possibility the plaintiff could cure the defect with an amendment. [Citation.] If we find that an amendment could cure the defect, we conclude that the trial court abused its discretion and we reverse; if not, no abuse of discretion has occurred. [Citation.] The plaintiff has the burden of proving that an amendment would cure the defect.” (Ibid.)
B. The Economic Loss Rule
As noted, the trial court sustained Nissan‘s demurrer to plaintiffs’ claim for fraudulent inducement—concealment on the ground it was barred by the economic loss rule. We conclude the economic loss rule does not bar plaintiffs’ fraud claim.2
The economic loss rule provides that, “[i]n general, there is no recovery in tort for negligently inflicted ‘purely economic losses,’ meaning financial harm unaccompanied by physical or property damage.” (Sheen v. Wells Fargo Bank, N.A. (2022) 12 Cal.5th 905, 922 (Sheen).) For claims arising from alleged product defects, “[e]conomic loss consists of ‘ ” ‘damages for inadequate value, costs of repair and replacement of the defective product or consequent loss of profits—without any claim of personal injury or damages to other property . . . .” ‘ ” (Robinson, supra, 34 Cal.4th at p. 988.)
The Sheen court noted the economic loss rule “has been applied in various contexts. First, it carries force when courts are concerned about imposing ‘liability in an indeterminate amount for an indeterminate time to an indeterminate class.” ‘ ” (Sheen, supra, 12 Cal.5th at p. 922, quoting Southern California Gas Leak Cases (2019) 7 Cal.5th 391, 414.)
Second, “[i]n another recurring set of circumstances, the rule functions to bar claims in negligence for pure economic losses in deference to a
The Robinson court explained: ” ‘ ” ‘[W]here a purchaser‘s expectations in a sale are frustrated because the product he bought is not working properly, his remedy is said to be in contract alone, for he has suffered only “economic” losses.’ “. . .’ [Citation.] The economic loss rule requires a purchaser to recover in contract for purely economic loss due to disappointed expectations, unless he can demonstrate harm above and beyond a broken contractual promise. [Citation.] Quite simply, the economic loss rule ‘prevent[s] the law of contract and the law of tort from dissolving one into the other.’” (Robinson, supra, 34 Cal.4th at p. 988.)
The Robinson court also described instances where tort damages are permitted in contract cases.3 “Tort damages have been permitted in contract cases where a breach of duty directly causes physical injury [citation]; for breach of the covenant of good faith and fair dealing in insurance contracts [citation]; for wrongful discharge in violation of fundamental public policy [citation]; or where the contract was fraudulently induced. [Citation.]’ [Citation.] ‘[I]n each of these cases, the duty that gives rise to tort liability is either completely independent of the contract or arises from conduct which is both intentional and intended to harm.’” (Robinson, supra, 34 Cal.4th at pp. 989-990.)
Here, the fraudulent inducement exception to the economic loss rule applies. Plaintiffs allege that Nissan, by intentionally concealing facts about the defective transmission, fraudulently induced them to purchase a car. Fraudulent inducement is a viable tort claim under California law. “The elements of fraud are (a) a misrepresentation (false representation, concealment, or nondisclosure); (b) scienter or knowledge of its falsity; (c) intent to induce reliance; (d) justifiable reliance; and (e) resulting damage. [Citations.]
To hold, at the demurrer stage, that plaintiffs’ fraud claim is barred by the economic loss rule, we would need to conclude, as Nissan urges us to do, that (1) despite the Supreme Court‘s statement in Robinson, there is no exception to the economic loss rule for fraudulent inducement claims (or at least no exception that encompasses the claim plaintiffs allege in the SAC), or (2) plaintiffs have not adequately pleaded a claim for fraudulent inducement under California law (a question we address in pt. II.C., post). We reject both arguments and conclude the economic loss rule does not bar plaintiffs’ claim.
Nissan contends that, under Robinson, fraud claims between contracting parties “can proceed only if they are truly independent of the contract and involve affirmative misrepresentations,” and that plaintiffs’ fraud claim (based on concealment) does not satisfy either condition. The trial court applied the same two requirements, holding plaintiffs’ fraud claim was barred because it involved concealment (rather than affirmative misrepresentations) and because plaintiffs did not allege damages independent of their economic loss.
We do not agree with the trial court‘s and Nissan‘s reading and application of Robinson. Robinson did not hold that any claims for fraudulent inducement are barred by the economic loss rule. Quite the contrary, the Robinson court affirmed that tort damages are available in contract cases where the contract was fraudulently induced. (Robinson, supra, 34 Cal.4th at pp. 989-990.) The Robinson court then addressed the fraud claims that were presented in that case, involving alleged fraud (both affirmative misrepresentations and intentional concealment) that occurred during the performance of a contract—Dana, a supplier of helicopter parts (1) provided false “certificates of conformance” to the manufacturer (Robinson) stating the parts conformed to contractual requirements and (2) allegedly concealed information about the parts. (Id. at p. 990; see id. at pp. 986-987.)
As to those claims, the court focused on Robinson‘s “fraud and misrepresentation claim based on Dana‘s provision of the false certificates of conformance.” (Robinson, supra, 34 Cal.4th at p. 990.) The court concluded this tortious conduct “was separate from” Dana‘s breach of contract, which involved its provision of the nonconforming parts. (Id. at p. 991.) In addition, Dana‘s provision of faulty parts exposed Robinson to liability for personal damages if a helicopter crashed. (Ibid.) The court thus held that “the
The Robinson court explained that its holding was strongly supported by California‘s public policy favoring the punishment and deterrence of fraud. (Robinson, supra, 34 Cal.4th at pp. 991-992.) The court rejected Dana‘s argument that a breach of contract remedy was sufficient, noting that, while contracting parties generally can agree to allocate their risks, benefits, and obligations as they see fit, ” ‘[a] party to a contract cannot rationally calculate the possibility that the other party will deliberately misrepresent terms critical to that contract.’ [Citation.] No rational party would enter into a contract anticipating that they are or will be lied to.” (Id. at p. 993.)
Finally, the Robinson court noted its holding was “narrow,” in part because it had only reached the question whether Robinson‘s affirmative misrepresentation claims were viable. (Robinson, supra, 34 Cal.4th at p. 993.) The court stated: “Nor do we believe that our decision will open the floodgates to future litigation. Our holding today is narrow in scope and limited to a defendant‘s affirmative misrepresentations on which a plaintiff relies and which expose a plaintiff to liability for personal damages independent of the plaintiff‘s economic loss. In addition, ‘[i]n California, fraud must be pled specifically; general and conclusory allegations do not suffice. [Citations.]’ . . . We trust the trial courts of this state to enforce this pleading requirement.” (Ibid.)
Applying Robinson here (and cognizant that our Supreme Court may soon provide additional guidance), we conclude plaintiffs’ claim for fraudulent inducement by concealment is not subject to demurrer on the ground it is barred by the economic loss rule. Robinson left undecided whether concealment-based claims are barred by the economic loss rule. What follows from its analysis, however, is that concealment-based claims for fraudulent inducement are not barred by the economic loss rule. The reasoning in
In our view, that independence is present in the case of fraudulent inducement (whether it is achieved by intentional concealment or by intentional affirmative misrepresentations), because a defendant‘s conduct in fraudulently inducing someone to enter a contract is separate from the defendant‘s later breach of the contract or warranty provisions that were agreed to. In Anderson, supra, 74 Cal.App.5th 946, the Court of Appeal contrasted these two types of conduct, although not in the context of determining the applicability of the economic loss rule. (Id. at pp. 966-967.) In Anderson, after purchasing a pickup truck that turned out to be defective, the plaintiffs sued Ford and prevailed at trial on both a Song-Beverly Act warranty cause of action and a cause of action for “fraud in the inducement—concealment.” (Id. at p. 950.)
On appeal, Ford argued the plaintiffs could not recover both a statutory civil penalty under the Song-Beverly Act and punitive damages (the latter being based on the fraud claim and a claim under the Consumers Legal Remedies Act (CLRA) (
Similarly, here, plaintiffs’ fraudulent inducement claim alleges presale conduct by Nissan (concealment) that is distinct from Nissan‘s alleged subsequent conduct in breaching its warranty obligations. As Nissan notes, plaintiffs’ SAC includes some allegations that do not fall neatly into one of these two categories. For example, in their fraudulent inducement cause of action, plaintiffs include some allegations about the failure of Nissan to make
As the parties note and as the Ninth Circuit outlined in Rattagan, supra, 19 F.4th at pp. 1191-1192, courts in other states have reached differing conclusions as to the scope of the economic loss rule and the extent to which it precludes fraud claims. (Compare, e.g., Milan Supply Chain Solutions v. Navistar, Inc. (Tenn. 2021) 627 S.W.3d 125, 153-154 [declining to adopt “a broad rule either extending the economic loss rule to all fraud claims or exempting all fraud claims from the economic loss rule,” but holding fraudulent inducement claims are barred by the rule if the only misrepresentations concern the quality or character of the goods sold and the contract is “between sophisticated commercial business entities“], with, e.g., Van Rees v. Unleaded Software, Inc. (Colo. 2016) 373 P.3d 603, 608 [economic loss rule did not bar fraudulent inducement claims; “The court of appeals seemed concerned that if it did not affirm the dismissal of the tort claims in this case, the purposes underlying the economic loss rule would not be served, as tort law would swallow contract law. [Citation.] However, we also must be cautious of the corollary potential for contract law to swallow tort law.“].)
Similarly (as also outlined by the parties and the Ninth Circuit), federal district courts applying California law have diverged on this point. (Compare, e.g., White v. FCA US LLC (N.D.Cal. 2022) 2022 U.S.Dist.LEXIS 146604, *9-*13 [under California law, fraudulent inducement claims fall within a
We acknowledge the differing views taken by courts that have considered this issue. But for the reasons we have discussed above, we conclude that, under California law, the economic loss rule does not bar plaintiffs’ claim here for fraudulent inducement by concealment. Fraudulent inducement claims fall within an exception to the economic loss rule recognized by our Supreme Court (Robinson, supra, 34 Cal.4th at pp. 989-990), and plaintiffs allege fraudulent conduct that is independent of Nissan‘s alleged warranty breaches.6 The trial court erred by sustaining Nissan‘s demurrer to plaintiffs’ fraud claim on the ground it was barred by the economic loss rule.
C. The Sufficiency of the Allegations in the SAC
As an alternative ground for affirmance, Nissan argues plaintiffs did not plead their claim for fraudulent inducement by concealment with sufficient specificity. The trial court did not reach this ground for demurrer. We conclude the claim is adequately pleaded.
“As with all fraud claims, the necessary elements of a concealment/suppression claim consist of ‘ “(1) misrepresentation (false representation, concealment, or nondisclosure); (2) knowledge of falsity (scienter); (3) intent to defraud (i.e., to induce reliance); (4) justifiable reliance; and (5) resulting damage.” ‘ ” (Hoffman v. 162 North Wolfe LLC (2014) 228 Cal.App.4th 1178, 1185-1186.) Suppression of a material fact is actionable when there is a duty of disclosure, which may arise from a relationship between the parties, such as a buyer-seller relationship. (Id. at pp. 1186-1187.) Fraud, including concealment, must be pleaded with
Plaintiffs alleged the above elements of fraud in the SAC. As we have discussed, plaintiffs alleged the CVT transmissions installed in numerous Nissan vehicles (including the one plaintiffs purchased) were defective; Nissan knew of the defects and the hazards they posed; Nissan had exclusive knowledge of the defects but intentionally concealed and failed to disclose that information; Nissan intended to deceive plaintiffs by concealing known transmission problems; plaintiffs would not have purchased the car if they had known of the defects; and plaintiffs suffered damages in the form of money paid to purchase the car.
In its short argument on this point in its appellate brief, Nissan argues plaintiffs did not adequately plead the existence of a buyer-seller relationship between the parties, because plaintiffs bought the car from a Nissan dealership (not from Nissan itself). At the pleading stage (and in the absence of a more developed argument by Nissan on this point), we conclude plaintiffs’ allegations are sufficient. Plaintiffs alleged that they bought the car from a Nissan dealership, that Nissan backed the car with an express warranty, and that Nissan‘s authorized dealerships are its agents for purposes of the sale of Nissan vehicles to consumers. In light of these allegations, we decline to hold plaintiffs’ claim is barred on the ground there was no relationship requiring Nissan to disclose known defects.
Nissan also contends plaintiffs did not provide specifics about what Nissan should have disclosed. But plaintiffs alleged the CVT transmissions were defective in that they caused such problems as hesitation, shaking, jerking, and failure to function. The SAC also alleged Nissan was aware of the defects as a result of premarket testing and consumer complaints that were made both to NHTSA and to Nissan and its dealers. It is not clear what additional information Nissan believes should have been included.7 We decline to hold (again in the absence of a more developed argument on this point) that plaintiffs were required to include in the SAC more detailed allegations about the alleged defects in the CVT. We conclude plaintiffs’ fraud claim was adequately pleaded.
III. DISPOSITION
The April 2021 judgment is reversed. The trial court‘s orders (1) sustaining Nissan‘s demurrer to plaintiffs’ claim for fraudulent inducement by concealment (the fourth cause of action in the SAC), and (2) granting Nissan‘s motion to strike the SAC‘s punitive damages allegations, are reversed. The trial court is directed to enter a new order or orders overruling the demurrer and denying the motion to strike. The case is remanded for further proceedings on plaintiffs’ claim for fraudulent inducement by concealment, plaintiffs having dismissed their other claims with prejudice. Plaintiffs shall recover their costs on appeal.
STREETER, J.
WE CONCUR:
POLLAK, P. J.
GOLDMAN, J.
Trial Court: Superior Court of California, County of Alameda
Trial Judge: Hon. Richard Seabolt
Counsel: Knight Law Group, Steve Mikhov, Christopher Swanson, Roger R. Kirnos; Greines, Martin, Stein & Richland, Cynthia E. Tobisman, Marc J. Poster, Alana H. Rotter for Plaintiffs and Appellants.
Shook, Hardy & Bacon, Amir Nassihi, M. Kevin Underhill for Defendant and Respondent.
Dhital v. Nissan North America, Inc. - A162817