Chung v. Intellectsoft Group Corporation

Background

Hope Chung and Picture Mandarin LLC hired Intellectsoft and Intellectsoft Group Corporation to develop a website, mobile application, and other software for an educational program intended to teach Mandarin to children. The work was primarily governed by two contracts. The contracts provided that past-due payments would bear interest at 15% per year or the maximum rate allowed by law.

Chung alleged that the Intellectsoft Defendants failed to deliver the required work according to her specifications, timelines, and budget. Intellectsoft, LLC filed a counterclaim alleging that Chung failed to make timely payments on eight invoices and seeking interest on those allegedly overdue amounts.

Chung and Picture Mandarin LLC moved to dismiss or strike Intellectsoft, LLC’s counterclaim.

Documents Considered

The court applied the rule governing dismissal for failure to state a legally sufficient claim. It generally could not consider material outside the pleadings unless the material was incorporated by reference or qualified for judicial notice. The court found that the eight invoices were incorporated by reference because the counterclaim referred to them extensively, they formed the basis of the counterclaim, and Intellectsoft did not dispute their authenticity.

The court did not consider a May 2017 invoice because the counterclaim did not refer to it or rely on it. The court also declined to consider materials that were not properly part of the counterclaim when deciding the motion.

Motion to Strike

Chung argued that Intellectsoft’s counterclaim was filed late and that Chung’s agreement to an extension for filing an answer was obtained under false pretenses. Intellectsoft argued that the counterclaim was timely because a counterclaim is part of an answer.

The court held that an answer and a counterclaim are one pleading, not separate pleadings. Because Intellectsoft received an extension to file its answer, its counterclaim was timely. The court therefore denied Chung’s motion to strike the counterclaim.

Statute of Limitations

Chung argued that the counterclaim was barred by California’s four-year statute of limitations for claims based on written contracts. She relied on the date of the last invoice, November 2, 2016, and the date Intellectsoft filed its counterclaim, August 15, 2022.

Intellectsoft argued that the deadline was extended by Chung’s partial payment of the debt and by Chung’s filing of the original complaint. The court rejected both arguments on the record before it. The last supported payment occurred on or about November 2, 2016, so the four-year period expired on November 2, 2020. The original complaint was filed on April 27, 2021, after that period had expired, meaning the counterclaim was not an otherwise timely claim when Chung filed the complaint.

The court dismissed Intellectsoft’s counterclaim on the statute-of-limitations issue. However, it found that Intellectsoft might be able to plead facts showing that the deadline was extended under the partial-payment rule. The court therefore granted Intellectsoft leave to amend. The amended counterclaim could address only the deficiencies identified in the order and had to be filed within 21 days. The order states that failure to file a timely amended counterclaim would result in dismissal of the counterclaim with prejudice.

Waiver

Chung argued that Intellectsoft waived its claim for interest because the invoices were marked “paid” and because internal emails allegedly showed that Intellectsoft considered Chung’s account fully paid. Intellectsoft disputed waiver and asked the court not to consider the internal emails in deciding the dismissal motion.

The court declined to convert the dismissal motion into a motion for summary judgment because Intellectsoft had not had a reasonable opportunity to present all relevant evidence. The court then considered the invoices. It found that the invoices appeared to show payment of the principal amounts for work performed, but did not address payment of interest. The invoices therefore did not establish that Intellectsoft intentionally gave up its right to seek interest. The court declined to dismiss the counterclaim on waiver grounds.

Disposition

The court granted in part and denied in part Chung and Picture Mandarin LLC’s motion to dismiss or strike. It denied the motion to strike, dismissed Intellectsoft, LLC’s counterclaim based on the statute of limitations, granted leave to amend within 21 days, declined to dismiss the counterclaim on waiver grounds, and denied the request to convert the dismissal motion into a summary-judgment motion.