Jennifer Tulley Architect, Inc. v. Shin

Background

Jeannie Shin hired Jennifer Tulley in October 2019 to serve as an architect for a home-remodeling project. At the time, Tulley was a principal of Jennifer Tulley Architect, Inc. (JTA). Tulley sent Shin monthly bills, including charges for work by unnamed “Junior Architects.” Shin paid the November and December 2019 bills.

In January 2020, Tulley and TEF Architecture and Interior Design, Inc. entered into a letter agreement under which Tulley would become a TEF employee and initially serve as an Associate Principal, a non-equity position. The agreement also addressed possible credit for JTA projects, interviews for some of Tulley’s staff, and payment of the remaining rent on Tulley’s office lease.

In February 2020, Tulley told Shin that JTA was being acquired and that Tulley and her team would complete Shin’s project while working at TEF. Tulley continued sending Shin bills for architectural services during the first three months of 2020. Shin disputed those bills and did not pay them. JTA later sued Shin to recover unpaid fees and to stop her from using Tulley’s architectural drawings. During discovery, Shin learned that two people who performed more than 90 percent of the billed hours were not licensed architects. They had worked for JTA until February 2020 and then moved to TEF.

Shin asserted claims for fraud, unjust enrichment, violations of California’s Unfair Competition Law and Consumers Legal Remedies Act, and declaratory relief. She brought claims against JTA, Tulley, and TEF. After the court dismissed an earlier version of Shin’s claims against TEF as too conclusory, Shin filed a first amended third-party complaint. TEF again moved to dismiss.

Successor Liability

Shin first argued that TEF could be liable for JTA’s liabilities because TEF was JTA’s successor. Under the general rule described by the court, a company that purchases another company’s assets does not ordinarily assume the seller’s liabilities. California law recognizes exceptions, including when the transaction is a merger or consolidation or when the purchasing company is a “mere continuation” of the seller.

The court held that Shin had not plausibly alleged a merger or consolidation. Shin did not allege that JTA ceased to exist or that the two companies dissolved and formed a single new company. The letter agreement between Tulley and TEF did not establish a merger or consolidation, particularly because JTA was not a party to that agreement.

The court also held that Shin had not plausibly alleged that TEF was a mere continuation of JTA. The allegations did not show that TEF gave inadequate consideration for JTA’s assets. The agreement contemplated that TEF might accept particular JTA projects, but it did not identify any projects that were transferred, and it did not show that any were transferred for inadequate consideration. The allegations also did not show that an officer, director, or stockholder of JTA held the same position at TEF. Tulley’s initial position at TEF was Associate Principal, which was non-equity. The court therefore granted TEF’s motion as to Shin’s successor-liability theory.

Vicarious Liability

Shin’s second theory was vicarious liability. Under this doctrine, an employer may be held responsible for an employee’s torts committed within the scope of employment. Shin alleged that Tulley continued making misrepresentations about the “Junior Architects” after Tulley began working for TEF and that those statements were made as part of her work for TEF.

The court found these allegations sufficient at the motion-to-dismiss stage. It concluded that Tulley’s statements were plausibly fraudulent or deceptive and that she plausibly made at least some of them as a TEF agent. Whether Tulley was acting within the scope of employment is ordinarily a factual question, and the court found no reason to decide that question differently at this stage.

The court limited this theory to statements Tulley made while working for TEF. TEF could not be held vicariously liable for torts Tulley committed before she began working for TEF. The court therefore denied TEF’s motion as to Shin’s vicarious-liability theory.

Disposition

The court granted in part and denied in part TEF’s motion to dismiss. It granted the motion as to successor liability and denied it as to vicarious liability. The court gave Shin leave to amend her third-party complaint one more time. If Shin amended, the deadline was May 26, 2023; if she did not amend, TEF’s answer was due June 2, 2023. The order was issued by United States Magistrate Judge Alex G. Tse.