E-FAB, INC., Plaintiff and Appellant,
v.
ACCOUNTANTS, INC. SERVICES, Defendant and Respondent.
Court of Appeal of California, Sixth District.
*11 Christian B. Nielsen, Anne B. Miller, Robinson & Wood, Inc., San Jose, CA, for Plaintiff and Appellant.
Eriksen, Arbuthnot, Brown, et al., Steve W. Dollar, San Jose, Benjamin Alexander Emmert, for Defendant and Respondent.
*10 McADAMS, J.
At issue in this appeal is the accrual date of the plaintiffs causes of action against the defendant for negligence, negligent misrepresentation, and breach of contract. The plaintiff was the victim of embezzlement by an employee, whom the defendant had recruited and placed with the plaintiff. The trial court concluded that the plaintiff should have discovered the embezzlement sooner, and it therefore sustained the defendant's demurrer, brought on statute of limitations grounds. The plaintiff brought this appeal from the ensuing judgment. Applying the delayed discovery rule to the plaintiffs claims of independent wrongdoing by defendant, we conclude that the trial court erred in finding the plaintiffs claims barred as a matter of law. We therefore reverse the judgment.
*12 BACKGROUND
Only two of the parties to this action are before us on appeal: appellant E-Fab, Inc. (plaintiff) and respondent Accountants, Inc. Services (defendant).
Facts[1]
Plaintiff designs and manufactures precision components and tools. Plaintiff has been in business since 1981, employing 15 to 20 individuals at any given time.
In 1996, plaintiff needed "a new bookkeeper to manage its financial affairs including accounts receivable and accounts payable." Plaintiff contacted defendant "to obtain a temporary accountant who was qualified to work for plaintiff in such a position." Defendant agreed to provide "temporary or permanent accountants to meet plaintiffs accounting needs. Defendant represented that the candidates "had been personally interviewed," that "their background, qualifications, accomplishments, employment references, academic credentials had been screened, confirmed and verified," and that "the temporary accountants had been recruited by [defendant] and were employed, supervised and managed by [defendant]."
Relying on those representations by defendant, "plaintiff hired defendant Vickie Hunt as a temporary accountant and then as a permanent accountant/bookkeeper." As it turned out, Hunt had prior criminal convictions for theft and for welfare fraud, she had been incarcerated, and she had falsified her academic credentials, but defendant had failed to discover any of those problems in its screening process.
From 1996 to 2003, while employed by plaintiff, Hunt embezzled approximately $1 million. Hunt successfully avoided detection "by making multiple small withdrawals, in irregular amounts, to different payees," by destroying records, including parts of bank statements, and "by providing the management of [plaintiff] with erroneous financial information, both oral and written, as to the status of the bank accounts," as well as assurances that the information provided was accurate. As a result, "plaintiff had no reason to believe" that the embezzlement "was occurring."
Hunt's embezzlement scheme came to light in November 2003, when a prospective "new partner" was investigating plaintiffs finances. During the course of that investigation, "he discovered that Vickie Hunt had removed and destroyed portions of the monthly bank statements the company had received. After obtaining copies of the missing documents from the bank the evidence of Vickie Hunt's embezzlement was first uncovered." Law enforcement was notified in December 2003. A police investigation and an audit of plaintiffs finances disclosed "the nature and extent" of Hunt's embezzlement.
In connection with the law enforcement investigation, the police informed plaintiff of Hunt's criminal record. "It was at that time that Plaintiff first became aware that Vickie Hunt had not been `screened' by" defendant and that defendant's "representations as to her background were false."
In March 2005, Hunt was convicted by plea, sentenced to serve four years in state prison, and ordered to pay more than $1.5 million in restitution to plaintiff.
Procedural History
Plaintiff filed its initial complaint in August 2005, naming Hunt, defendant, and others. Of the five causes of action in the *13 complaint, three were asserted against defendant: the second cause of action, for negligence; the third cause of action, for negligent misrepresentation; and the fourth cause of action, for breach of implied in fact contract.
In response to plaintiffs complaint, defendant demurred and moved to strike the causes of action asserted against it. In its supporting papers, defendant asserted several grounds for the demurrer, including the complaint's untimeliness. Defendant also asked the court to take judicial notice of several documents, including the police report. That request drew plaintiffs successful objection. Plaintiff also opposed the demurrer and motion to strike on the merits. In January 2006, the trial court sustained the demurrer on the ground that the claims against defendant were barred by the statute of limitations. In its formal order, the court stated that plaintiff had failed to adequately plead facts bringing it within the delayed discovery rule. The court granted plaintiff leave to amend its complaint.
Plaintiff filed a first amended complaint in January 2006. As before, defendant demurred on statute of limitations grounds. It also requested the court to judicially notice the "fact that it is the custom of commercial banks to send its depositors a monthly statement...." Plaintiff opposed the demurrer. In its ruling, the trial court granted the request for judicial notice. As to the second and third causes of action (for negligence and negligent misrepresentation), the court sustained the demurrer, again granting plaintiff leave to amend; as to the fourth cause of action (for breach of implied contract), the court overruled the demurrer "as Defendant failed to assert any arguments in support thereof."
Plaintiff then filed a second amended complaint in March 2006. Once again, defendant demurred and requested judicial notice of the fact that banks customarily send monthly statements. As before, plaintiff resisted the demurrer on the merits. In June 2006, the trial court sustained the demurrer to the second, third, and fourth causes of action on statute of limitations grounds, but this time without leave to amend.
In July 2006, the court entered a judgment of dismissal in favor of defendant. This appeal by plaintiff followed.
DISCUSSION
The question before us is this: Considering the facts alleged on the face of the complaint, together with judicially noticed matters, are plaintiffs claims against defendant time-barred as a matter of law? To establish the proper framework for deciding that question, we first describe the standard of review that governs this appeal, which follows a demurrer. We then address the statute of limitations issues presented here.
I. Judgment Following Demurrer: Appellate Review
A. General Principles
"A demurrer tests the pleading alone, and not the evidence or the facts alleged." (City of Atascadero v. Merrill Lynch, Pierce, Fenner & Smith, Inc. (1998)
B. Demurrer Based on Statute of Limitations
At issue here is the sustention of defendant's demurrer on statute of limitations grounds. "The defense of statute of limitations may be asserted by general demurrer if the complaint shows on its face that the statute bars the action." (1 Schwing, Cal. Affirmative Defenses (Thomson West 2007) Statute of Limitations, § 25:78, p. 1609, fns. omitted; see Bennett v. Hibernia Bank (1956)
In assessing whether plaintiffs claims against defendant are time-barred, two basic questions drive our analysis: (a) What statutes of limitations govern the plaintiffs claims? (b) When did the plaintiffs causes of action accrue? As both parties acknowledge, the second question is the key inquiry here. We nevertheless begin with a brief discussion of the first issue, the governing limitations statutes.
II. The Limitations Period
A. General Principles
The applicable statute of limitations depends on "the nature of the cause of action, i.e., the `gravamen' of the cause of action." (Hensler v. City of Glendale (1994)
As relevant here, a cause of action for negligent misrepresentation typically is subject to a two-year limitations period. (See Code Civ. Proa, § 339; Ventura County Nat. Bank v. Mocker (1996)
Where more than one statute might apply to a particular claim, "a specific limitations provision prevails over a more general provision." (Creditors Collection Service v. Castaldi (1995)
B. Application
In this case, plaintiff asserts both tort and contract claims against defendant. In its order on defendant's first demurrer, plaintiff notes, the trial court applied a two-year statute to all of its claims, citing Code of Civil Procedure section 339. Plaintiff questions that decision, arguing that negligent misrepresentation is a "species of fraud," which is subject to the three-year statute provided in Code of Civil Procedure section 338, subdivision (d). (But see Ventura County Nat. Bank v. Mocker, supra, 49 Cal.App.4th at pp. 1530-1531,
In any event, plaintiff states, the choice of statute has "no bearing on the issue before this court." Rather, the "key question" here relates to accrualwhether plaintiff "may rely on the discovery rule." Defendant effectively agrees, stating: "Even if section 337 applies, the statute of limitations has run because each of the causes of action accrued in 1996...." And as one commentator has observed, a dispute over which statute governs "does not preclude a demurrer when the complaint is barred no matter which statute applies." (1 Schwing, Cal. Affirmative Defenses, supra, § 25:78, p. 1612.)
We therefore turn to the question of accrual.
III. Accrual: General Principles
The limitations period commences when the cause of action accrues. (Code Civ. Proc, § 312; Fox v. Ethicon Endo-Surgery, Inc. (2005)
A. The Discovery Rule
The discovery rule "postpones accrual of a cause of action until the plaintiff discovers, or has reason to discover, the cause of action." (Norgart, supra,
The discovery rule "may be expressed by the Legislature or implied by the courts." (Norgart, supra,
The discovery rule "protects the plaintiff, whose cause of action is preserved when, despite diligent investigation, he is blamelessly ignorant of the cause of his injuries. It also protects the defendant, who is spared precipitous litigation." (Bastian v. County of San Luis Obispo (1988)
B. Notice
Notice may be actual or constructive. (Civ.Code, § 18.) Actual notice is "express information of a fact," while constructive notice is that "which is imputed by law." (Ibid.) A person with "actual notice of circumstances sufficient to put a prudent man upon inquiry" is deemed to have constructive notice of all facts that a reasonable inquiry would disclose. (Civ. Code, § 19; see Hobart v. Hobart Estate Co. (1945)
Notice possessed by one person actual or constructivemay be imputed to another person. For example, it has long been the rule in California that "notice to an agent is notice to the principal...." (Watson v. Sutro (1890)
For purposes of accrual of the limitations period, inquiry notice is triggered by suspicion. As the California Supreme Court explained in the Jolly case: "Once the plaintiff has a suspicion of wrongdoing, and therefore an incentive to sue, she must decide whether to file suit or sit on her rights." (Jolly v. Eli Lilly & Co. (1988)
C. Pleading Requirements
"A plaintiff whose complaint shows on its face that his claim would be barred without the benefit of the discovery rule must specifically plead facts to show (1) the time and manner of discovery and (2) the inability to have made earlier discovery despite reasonable diligence. The burden is on the plaintiff to show diligence, and conclusory allegations will not withstand demurrer." (McKelvey v. Boeing North American, Inc. (1999)
D. Question of Law or Fact
"Resolution of the statute of limitations issue is normally a question of fact." (Fox, supra,
IV. Analysis
Governed by the foregoing principles, we turn to the case at hand. We proceed in two steps. First, we briefly address plaintiffs factual allegations concerning its former employee, Vickie Hunt, to the extent that those facts concern plaintiffs diligence in discovering the embezzlement. Next, we analyze the accrual question as it relates more directly to defendant.
A. Plaintiff's Allegations Against Hunt
As alleged in the operative pleading, Hunt successfully avoided detection by various means, including destroying parts of bank statements, and her embezzlement did not come to light until a proposed new partner investigated plaintiffs finances.[2]
Defendant asserts that plaintiff should have discovered the embezzlement earlier, saying: "It is clear from the manner in *18 which Appellant claims it first discovered Mrs. Hunt's embezzlement that the same information ... would have been discovered much earlier if it ever reviewed ... bank statements that it received on a monthly basis from 1996 to 2003." As legal support for that assertion, defendant relies principally on Sun `n Sand, Inc. v. United California Bank, supra,
We question whether the complaint before us here so clearly and affirmatively discloses plaintiffs lack of diligence in uncovering the embezzlement that the determination may be made as a matter of law. We need not decide that question, however. What concerns us here is not plaintiffs discovery of Hunt's fraud, but rather its discovery of defendant's independent wrongdoing, a point we consider now.
B. Plaintiff's Claims Against Defendant
Our analysis of the accrual of plaintiffs claims against defendant proceeds in two steps. First, we discuss the separate accrual trigger for defendant's independent wrong. Next, we assess plaintiffs second amended complaint to determine whether it meets the requisite pleading standards to survive demurrer.
1. Independent Accrual of Plaintiffs Claims Against Defendant
The first step in the analysis requires us to segregate plaintiffs claims *19 against its employee Hunt from its claims against defendant, recognizing that each may accrue at a different time. As the California Supreme Court explained in Fox, "if a plaintiffs reasonable and diligent investigation discloses only one kind of wrongdoing when the injury was actually caused by tortious conduct of a wholly different sort, the discovery rule postpones accrual of the statute of limitations on the newly discovered claim." (Fox, supra,
A similar accrual principle has been recognized in other contexts, in appellate decisions predating Fox that involve claims against a single wrongdoer. One example is Snow v. AH. Robins Co., supra,
A somewhat analogous question concerning the accrual trigger was presented in Brandon G. v. Gray (2003)
To sum up, as Fox teaches, claims based on two independent legal theories against two separate defendants can accrue at different times. (Fox, supra, 35 Cal.4th at pp. 802-303,
Applying the foregoing legal authority, we conclude that the accrual trigger in this case was plaintiffs discovery that defendant had misrepresented Hunt's record and qualifications, not any earlier notice of Hunt's fraud. The limitations period thus commenced in November 2003, when the police reported Hunt's criminal record, which first put plaintiff on notice of defendant's independent wrongdoing.
Since plaintiff filed this action in August 2005, and since both parties agree that the shortest limitations period is two years, the action is not barred, provided only that plaintiff has met the pleading requirements imposed by the discovery rule. We turn to that issue now.
2. Adequacy of Plaintiffs Pleading
As noted above, a plaintiff invoking "the discovery rule must specifically plead facts to show (1) the time and manner of discovery and. (2) the inability to have made earlier discovery despite reasonable diligence. The burden is on the plaintiff to show diligence, and conclusory allegations will not withstand demurrer." (McKelvey v. Boeing North American, Inc., supra,
a. Time And Manner Of Discovery
The first prong requires plaintiffs to allege "facts showing the time and surrounding *21 circumstances of the discovery of the cause of action upon which they rely." (Bennett v. Hibernia Bank, supra,
Here, plaintiff alleges that it "did not become aware of, nor did it have any reason to suspect, that Vickie Hunt had prior convictions for theft and welfare fraud and that her academic credentials had not been verified until after her embezzlement became known in November 2003 when Plaintiff was first informed of Vickie Hunt's criminal record by the police. It was at that time that Plaintiff first became aware that Vickie Hunt had not been `screened' by [defendant] and that [defendant's] representations as to her background were false."
Given the specificity of the foregoing allegations, we conclude that the factual circumstances of plaintiffs discovery of defendant's wrongdoing are sufficiently asserted to meet this first pleading requirement of the delayed discovery rule. (See Bennett v. Hibernia Bank, supra, 47 Cal.2d at pp. 563-564,
In contrast to the foregoing cases, the pleading here specifically describes both the time and the circumstances of plaintiffs discovery of its claim against defendant: "in November 2003 when Plaintiff was first informed of Vickie Hunt's criminal record by the police." Plaintiffs allegations show that it "actually learned something [it] did not know before." (Bennett v. Hibernia Bank, supra,
b. Inability To Have Made Earlier Discovery
As to the second pleading requirement, inability to have made an earlier discovery, plaintiff alleges that it had "no reason to suspect that [defendant] did not screen plaintiff and failed to discover she had prior convictions for theft and welfare fraud, or that her academic credentials were misrepresented, or that she was embezzling *22 money as Vickie Hunt appeared to be a competent and honest employee." Plaintiff also alleges that it relied on defendant's "expertise and experience in determining the qualifications and credentials of its accountants...."
As before, we find this averment adequate to meet the pleading requirements of the discovery rule and thus to survive demurrer. (See Bennett v. Hibernia Bank, supra, 47 Cal.2d at p. at pp. 563, 564,
In sum, we conclude, the pleading requirements for the delayed discovery rule are met here. In this case, it does not "clearly and affirmatively appear on the face of the complaint that the action is barred by the statute of limitations" and "the demurrer should have been overruled on this ground." (Geneva Towers Ltd. Partnership v. City and County of San Francisco, supra,
CONCLUSION
Assuming the truth of the facts alleged in plaintiffs second amended complaint, the running of the statute of limitations did not commence until November 2003, when plaintiff first learned from the police that Hunt's background was not as represented. This action was brought within two years of that discovery. Plaintiffs claims against defendant thus are not time-barred as a matter of law, and the trial court erred in sustaining defendant's demurrer on that grounds
*23 DISPOSITION
The judgment of dismissal is reversed.
WE CONCUR: BAMATTRE-MANOUKIAN, Acting P.J., and DUFFY, J.
NOTES
Notes
[1] Because this appeal follows a successful demurrer, the facts are drawn from the allegations of plaintiff's second amended complaint, the operative pleading. (See Gu v. BMW of North America, LLC (2005)
[2] Those allegations are set forth in some detail in the second amended complaint, as follows: Hunt "purposefully hid her ongoing embezzlement by transferring small sums of money, in irregular amounts, on a monthly basis, from plaintiff's commercial account at Comerica Bank to accounts at other banks not readily identified as Vickie Hunt's, and to other commercial accounts and to individuals not readily identified as pertaining to or related to Vickie Hunt." Hunt further avoided detection "by destroying checks [and] transfer authorizations, removing portions of the bank statements pertaining to the fraudulent transfers, by providing the management of [plaintiff] with erroneous financial information, both oral and written, as to the status of the bank accounts, and by assuring the management of [plaintiff] that the account! ]s payable and receivable were accurate, and in accordance with company policy." Plaintiff thus "had no reason to believe she was embezzling money, to doubt her competence or her representations regarding the finances of the company, or her honesty, due to her work skills and the representations of [defendant]." Hunt's embezzlement scheme did not come to light until "November of 2003 when the company was going to take on a new partner. During the course of the potential partner's investigation into the finances, of [plaintiff], and his attempt to reconcile recent bank transactions, he discovered that Vickie Hunt had removed and destroyed portions of the monthly bank statements the company had received. After obtaining copies of the missing documents from the bank the evidence of Vickie Hunt's embezzlement was first uncovered."
[3] We acknowledge the existence of authority questioning the precedential value of Sun `n Sand. (See, e.g., Roy Supply, Inc. v. Wells Fargo Bank (1995)