E-Fab, Inc. v. Accountants, Inc. Services

Decision Date16 July 2007
Docket NumberNo. H030624.,H030624.
Citation153 Cal.App.4th 1308,64 Cal.Rptr.3d 9
CourtCalifornia Court of Appeals Court of Appeals
PartiesE-FAB, INC., Plaintiff and Appellant, v. ACCOUNTANTS, INC. SERVICES, Defendant and Respondent.

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.

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.

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).

Facts1

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 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) 68 Cal.App.4th 445, 459, 80 Cal. Rptr.2d 329.) For that reason, we "assume the truth of the complaint's properly pleaded or implied factual allegations." (Schifando v. City of Los Angeles (2003) 31 Cal.4th 1074, 1081, 6 Cal.Rptr.3d 457, 79 P.3d 569.) We also "consider judicially noticed matters." (Ibid.) "In addition, we give the complaint a reasonable interpretation, and read it in context." (Ibid.) On appeal from a judgment of dismissal after a demurrer has been sustained without leave to amend, the plaintiff has the burden of proving error. (Ibid.) "Because the trial court's determination is made as a matter of law, we review the ruling de novo." (Moreno v. Sanchez (2003) 106 Cal. App.4th 1415, 1423, 131 Cal.Rptr.2d 684.)

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) 47 Cal.2d 540, 550, 305 P.2d 20.) There is an important qualification, however: "In order for the bar of the statute of limitations to be raised by demurrer, the defect must clearly and affirmatively appear on the face of the complaint; it is not enough that the complaint shows merely that the action may be barred." (McMahon v. Republic Van & Storage Co., Inc. (1963) 59 Cal.2d 871, 874, 31 Cal.Rptr. 603, 382 P.2d 875; see also, e.g., Geneva Towers Ltd. Partnership v. City and County of San Francisco (2003) 29 Cal.4th 769, 781, 129 Cal.Rptr.2d 107, 60 P.3d 692.) "The ultimate question for review is whether the complaint showed on its face that the action was barred by a statute of limitations, for only then may a general demurrer be sustained and a judgment of dismissal be entered thereon." (Moseley v. Abrams (1985) 170 Cal.App.3d 355, 358, 216 Cal.Rptr. 40.)

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...

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