Kalthia Engineering and Construction v. Chitturi CA4/1 ( 2022 )

Filed 12/14/22 Kalthia Engineering and Construction v. Chitturi CA4/1
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COURT OF APPEAL, FOURTH APPELLATE DISTRICT
DIVISION ONE
STATE OF CALIFORNIA
KALTHIA ENGINEERING AND D079526
CONSTRUCTION, LLC,
Plaintiff and Appellant, (Super. Ct. No. 37-2017-00003171-
CU-BC-CTL)
v.
SWATHI CHITTURI et al.,
Defendants and Respondents.
KALTHIA ENGINEERING AND D080121
CONSTRUCTION, LLC,
Plaintiff and Appellant, (Super. Ct. No. 37-2017-00003171-
CU-BC-CTL)
v.
RAGHUDHAR MADDALI,
Defendant and Respondent.
CONSOLIDATED APPEALS from a judgment and postjudgment order
of the Superior Court of San Diego County, Eddie C. Sturgeon, Judge.
Reversed.
AlvaradoSmith, W. Michael Hensley; Law Offices of Michael Wright
and Michael Wright for Plaintiff and Appellant.
Paschall Law and Patrick D. Paschall for Defendant and Respondent
Raghudhar Maddali.
No appearance for Defendant and Respondent Swathi Chitturi.
I.
INTRODUCTION
Plaintiff Kalthia Engineering and Construction, LLC (Kalthia) appeals
from a judgment entered after the superior court sustained the demurrer of
Raghudhar Maddali and Swathi Chitturi (Defendants) without leave to
amend. Defendants were members of 4S Foods, LLC (4S Foods), which
leased commercial space from Kalthia, and they signed a guaranty for
4S Foods’s lease obligations. After 4S Foods defaulted on the lease, Kalthia
sued Defendants for breach of guaranty. In a nonstatutory motion for
judgment on the pleadings, Maddali contended that the guaranty defined
4S Foods, and not the Defendants, as the guarantor. Kalthia filed a first
amended complaint acknowledging this fact but stating that this was a
mistake in the guaranty, and Defendants demurred. The superior court
ruled that, despite the fact that Kalthia had sufficiently pled allegations of
mistake, the court could not consider extrinsic evidence to change the
definition of guarantor as set forth in the guaranty. The court also noted that
the parties had been in possession of the guaranty for over five years prior to
4S Foods’s default, implying that Kalthia should have noticed and corrected
the error sooner. The court sustained the demurrer without leave to amend
and subsequently granted Maddali’s motion for attorney fees. Kalthia
separately appealed from the judgment and attorney fees order.
2
On appeal, Kalthia argues that the superior court erred by determining
that it could not consider extrinsic evidence to correct the mistake in the
guaranty. Kalthia further contends that it did not discover the mistake until
Defendants denied in this litigation that they were personal guarantors, that
whether delayed discovery applies is a factual issue, and that the court
should not have decided that issue on demurrer. Only Maddali filed a
respondent’s brief. He maintains that the court properly declined to consider
extrinsic evidence, and that Kalthia indisputably should have discovered the
mistake sooner. In his separate appeal of the attorney fee order, Kalthia
contends that if we reverse the judgment, we should reverse the attorney fees
order, which Maddali does not dispute.
We conclude that the superior court erred by sustaining the demurrers
without leave to amend. The court could have properly—and should have—
considered the extrinsic evidence of mistake to assess whether to correct the
guaranty, and should not have resolved the disputed factual issue of delayed
discovery at the pleading stage. Because we reverse the judgment, we must
reverse the attorney fees order, as well. The judgment and attorney fees
order are reversed.
II.
FACTUAL AND PROCEDURAL BACKGROUND1
A. Underlying events
Mitesh Kalthia (Mitesh) is the managing member of Kalthia, which
owns commercial property in San Diego.2 In 2010, Maddali, Chitturi’s
1 Because this appeal arises from a judgment after demurrer, we take
the relevant factual background from the allegations in the operative First
Amended Complaint (FAC).
2 We refer to Mitesh by first name for clarity; no disrespect is intended.
3
husband Gandhi Davuluri, and Praveen Vellanki were looking for space to
operate an Indian-themed restaurant and banquet hall. Real estate broker
Manoj “Mark” Maniar brought them to meet with Mitesh.
Maddali told Mitesh that he, Davuluri’s wife Chitturi, and Vellanki
were forming a new California limited liability company (LLC) named
“4S Foods, LLC,” with the three of them as members. Mitesh told them that
he would not enter into a commercial lease with a newly formed LLC without
a personal guaranty from its members, because the risks were too great.
Maddali, Davuluri, and Vellanki acknowledged Mitesh’s concerns and agreed
to provide personal guaranties.3
After additional meetings, the parties agreed to basic lease terms.
Kalthia would be the lessor, and 4S Foods would be the lessee. Maddali,
Vellanki, and Chitturi would personally guarantee the lease obligations, and
Kalthia would provide or pay for certain furnishings, fixtures, and
equipment. Maddali agreed to prepare the lease form, and broker Maniar
agreed to prepare an addendum with additional terms.
In early March 2010, Maniar sent Mitesh a copy of the lease form
(titled “Standard Shopping Center Lease and Sublease”) and addendum. The
lease term was five years, with a one-time renewal option. Section 1.9 of the
lease form stated, “Tenant’s Guarantor: ALL PARTNERS OF LLC OR
PARTNERSHIP.” In reviewing the lease form, Mitesh noticed that Section
1.2 did not state the landlord’s name, and had extraneous language about
another company. In addition, the addendum erroneously listed Mitesh,
3 The FAC alleges that it was never fully explained to Mitesh why
Chitturi, and not Davuluri, would be the LLC member, but that Mitesh later
learned that it had to do with Davuluri’s belief in astrology and horoscope
readings. As we explain next, it was Chitturi as an LLC member, not
Davuluri, who would provide the personal guaranty.
4
rather than Kalthia, as the landlord. The following week, Maniar sent
Mitesh a different version of the lease form and addendum. Section 1.9 still
stated, “Tenant’s Guarantor: ALL PARTNERS OF LLC OR PARTNERSHIP.”
Mitesh noticed that, again, Section 1.2 did not identify the landlord and that
he was listed as the landlord in the addendum. A few days later, Maniar sent
a corrected lease form excerpt and addendum. Mitesh confirmed that Section
1.9 said “Tenant’s Guarantor: ALL PARTNERS OF LLC OR
PARTNERSHIP,” that Section 1.2 correctly identified the landlord, and that
the addendum had been corrected.
Mitesh then e-mailed Maniar a blank “Guaranty of Lease” form. He
sent the e-mail at Maniar’s request, so that Maddali could fill out the form
and obtain the signatures of the guarantors (i.e., the members of 4S Foods).
In mid-March 2010, Maddali brought Mitesh a lease form that had
been modified to correct the earlier errors (“Lease”). Section 1.9 now stated,
“Tenant’s Guarantor: ALL PARTNERS OF LW OR PARTNERSHIP,” rather
than “LLC OR PARTNERSHIP.” Kalthia alleges that “neither of them
noticed the typographical error.” Before signing the lease, Mitesh asked
Maddali about the personal guaranties. Maddali said that he had received
the blank guaranty form and promised to fill it out and send it back within a
month, once he, Vellanki, and Chitturi had signed. Kalthia alleged that, “As
is customary in Indian culture, [Mitesh] accepted what he perceived to be
Maddali’s sincere promise to prepare and return the signed guaranty and
trusted Maddali, as Maddali, Vellanki, and Davuluri—during negotiations
leading up to the signing of the lease—continually assured Kalthia they
would personally guarantee the lease.” Mitesh signed the lease “[b]ased on
Maddali’s statement and the previous promises.”
5
Kalthia began performing its required work on the space, as lessor, and
incurred costs to do so. 4S Foods opened its restaurant in May 2010, and was
very successful at first. Maddali and Davuluri continued to promise that
they would send the guaranty signed by all members of 4S Foods “right
away” or “very soon.”
In November 2010, after repeated requests, Maddali returned the
Guaranty of Lease form that he had filled out (“Guaranty”). The Guaranty
identifies Kalthia as the Lessor, and 4S Foods as the Lessee. It then states,
“Whereas _4S Foods, LLC hereinafter referred to as ‘Guarantors’ have a
financial interest in Lessee, and [¶] Whereas, Lessor would not execute the
Lease if Guarantors did not execute and deliver to Lessor this Guarantee of
Lease.” The form then explains the terms of the Guaranty. Multiple
statements address both the Guarantors and the Lessee;4 the Guarantors
agree to jointly and severally guarantee the lease obligations; and the word
“Guarantors” (plural) is used throughout the form. At the signature lines,
under the word “GUARANTORS,” Maddali, Vellanki, and Chitturi each
hand-printed his or her name and signed next to it. They did not identify
themselves as members of 4S Foods, and 4S Foods is not otherwise
mentioned at the signature lines. Upon receiving the Guaranty, Mitesh
confirmed that Maddali, Chitturi, and Vellanki had signed as guarantors
next to their hand-printed names. He did not notice that, in the body of the
form, Maddali incorrectly designated 4S Foods as “Guarantors.” Kalthia
alleges:
4 For example, the Guaranty states that the “terms of the . . . Lease may
be altered . . . by agreement between Lessor and Lessee . . . without consent
or notice to Guarantors,” and that “Lessor shall have a right to proceed
against Guarantors hereunder following any breach . . . by Lessee without
first proceeding against Lessee . . . .”
6
“This incorrect designation was a mistake by Maddali as he and the
other guarantors who signed the guaranty understood they were
signing as individual guarantors as they had agreed during the lease
negotiations and after. These individuals also knew and understood
that Kalthia would not have leased the property to the newly-formed
4S Foods, LLC without their personal guaranties and they intended
that Kalthia rely on their promises in signing the lease on behalf of the
landlord, Kalthia Construction and Engineering, LLC, and expending
thousands of dollars to perform Landlord’s work as described in the
amendment to the lease. Neither Maddali, Vellanki, nor Chitturi they
signed the guaranty as individual guarantors until this litigation
began.” (Paragraph 21 of FAC.)
There appears to be an omitted word in the final sentence between “Chitturi”
and “they,” which Kalthia suggests on appeal was “denied.”5
In 2011, Vellanki wanted to withdraw from 4S Foods. Vellanki,
Chitturi, and Maddali signed a Membership Interest Redemption Agreement,
with Davuluri signing as manager of 4S Foods. Section 4.2 states in part
that “4s foods llc (sic) will request landlord release from personal guarantee
of the current lease. Withdrawing member should sign required documents.”
After Vellanki withdrew, disputes between the members began to affect
the business. Nevertheless, 4S Foods extended the lease term in March 2015.
In December 2016, 4S Foods fell behind on rent and was served with a
three-day notice to pay rent or quit. When it failed to pay any of the rent
that was due, Kalthia sued 4S Foods for unlawful detainer. By 2017,
4S Foods was insolvent. In February 2017, the parties stipulated to a
possession-only unlawful detainer judgment. After a third party claim in
that proceeding was denied, the premises were restored to Kalthia.
5 Kalthia contends on appeal that “neither Maddali, Vellanki, nor
Chitturi ever denied they signed the guaranty as individual guarantors until
after litigation was commenced,” emphasis omitted. This is a reasonable
characterization of the allegation in the FAC.
7
According to the FAC, the premises had been “trashed” by Maddali, Davuluri,
or their representatives. Kalthia was able to find a replacement tenant,
reducing its overall claimed damages to around $200,000.
B. Litigation
In January 2017, Kalthia filed a complaint for breach of written
guaranty against Maddali, Chitturi, and Vellanki, seeking damages,
declaratory relief, and attorney fees. Vellanki was later dismissed from the
case without prejudice.
In October 2019, Maddali filed a nonstatutory motion for judgment on
the pleadings, contending that the Guaranty “unambiguously defines”
4S Foods as guarantor and that the parol evidence rule bars introduction of
extrinsic evidence to show otherwise. The record does not reflect any ruling
on the motion.6
In November 2019, Kalthia filed its FAC. Maddali demurred, joined by
Chitturi, and again argued that the Guaranty defined the guarantor as
4S Foods and that extrinsic evidence could not be considered. Kalthia filed
an opposition, arguing that the allegations in the FAC identified admissible
evidence that would establish that, due to a mistake, the Guaranty did not
state the parties’ true agreement, and that extrinsic evidence also would be
admissible to construe ambiguity in the Guaranty. In reply, Maddali
contended in part that Kalthia had not asserted a cause of action for
reformation, suggesting that pleading reformation was necessary, and that
the statute of limitations to do so had run.
6 Maddali lodged a copy of the motion, which we construe as a motion to
augment; we grant the motion. (Cal. Rules of Court, rule 8.155(a)(1).) He
states in his respondent’s brief that the motion was granted, but does not cite
or provide an order to this effect.
8
At the demurrer hearing, Kalthia’s counsel argued, “Nobody is going to
ask for a guaranty from a newly-formed LLC of the newly-formed LLC’s
obligations under the lease. It just doesn’t make sense.” The superior court
took the matter under submission to consider the issue of the “lessee and the
guarantor [being] the same.” The court later entered a minute order
sustaining the demurrer without leave to amend. The order states:
“Although plaintiff has alleged sufficient facts to support an ambiguity
and resulting mistake in the terms of the [G]uaranty with regard to the
lease agreement [record citation], when the [G]uaranty is reviewed, the
[G]uaranty defines the guarantors as 4S. Extrinsic evidence cannot
change this definition. Furthermore, the parties had the [G]uaranty in
their possession almost five years before the default.”
The superior court entered judgment, from which Kalthia appeals.
Only Maddali filed a respondent’s brief. Following the entry of judgment,
Maddali moved for an award of attorney fees in the superior court. The court
awarded Maddali $28,360 in attorney fees. Kalthia appealed the fees order
as well.7
III.
DISCUSSION
Kalthia contends that the superior court erred by concluding that
extrinsic evidence would not be admissible to establish a mistake in the
Guaranty, and by deciding the factual issue of delayed discovery at the
demurrer stage. We agree with both contentions.8
7 Kalthia suggests that the appeals should be consolidated, and Maddali
does not oppose. We consolidate the appeals for purposes of decision. (See
Hong Sang Market, Inc. v. Peng (2018) 20 Cal.App.5th 474, 481, fn. 1.)
8 We need not and do not reach Kalthia’s alternative argument that the
Guaranty is ambiguous and that extrinsic evidence may be considered to
resolve the ambiguity.
9
A. Applicable legal principles
1. Contractual interpretation and mistake
“ ‘The purpose of the law of contracts is to protect the reasonable
expectations of the parties.’ ” (ASP Properties Group, L.P. v. Fard, Inc. (2005)
133 Cal.App.4th 1257, 1268.)
“Under long-standing contract law, a ‘contract must be so interpreted
as to give effect to the mutual intention of the parties as it existed at the time
of contracting, so far as the same is ascertainable and lawful.’ (Civ. Code,
§ 1636.) Although ‘the intention of the parties is to be ascertained from the
writing alone, if possible’ (id., § 1639), ‘[a] contract may be explained by
reference to the circumstances under which it was made, and the matter to
which it relates’ (id., § 1647).” (Hess v. Ford Motor Co. (2002) 27 Cal.4th 516,
524 (Hess).) Further, “ ‘[w]hen, through . . . mistake . . . , a written contract
fails to express the real intention of the parties, such intention is to be
regarded, and the erroneous parts of the writing disregarded.’ (Civ. Code,
§ 1640.)” (Hess, at p. 524.)
Civil Code section 3399 provides: “When, through fraud or a mutual
mistake of the parties, or a mistake of one party, which the other at the time
knew or suspected, a written contract does not truly express the intention of
the parties, it may be revised on the application of a party aggrieved, so as to
express that intention, so far as it can be done without prejudice to rights
acquired by third persons, in good faith and for value.” (See Hess, supra,27 Cal.4th at p. 524 [quoting same]; ibid. [in “reforming the written
agreement, a court may ‘transpose[ ], reject[ ], or suppl[y]’ words”].)
The parol evidence rule, codified in Civil Code section 1625 and Code of
Civil Procedure section 1856, “ ‘generally prohibits the introduction of any
extrinsic evidence, whether oral or written, to vary, alter or add to the terms
10
of an integrated written instrument.’ ” (Casa Herrera, Inc. v. Beydoun (2004)
32 Cal.4th 336, 343.) However, “[w]here a mistake . . . is put in issue by the
pleadings,” the parol evidence rule “does not exclude evidence relevant to that
issue.” (Code Civ. Proc., § 1856, subd. (e).)9
2. Standard of review on demurrer
“ ‘A demurrer tests the legal sufficiency of the complaint.’ ” (All of Us
or None–Riverside Chapter v. Hamrick (2021) 64 Cal.App.5th 751, 763
(Hamrick).) “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.” (T.H. v. Novartis
Pharmaceuticals Corp. (2017) 4 Cal.5th 145, 162 (Novartis).) “ ‘For purposes
of review, we accept as true all material facts alleged in the complaint, but
not contentions, deductions or conclusions of fact or law. . . .’ ” (Hamrick, at
p. 763.)
“ ‘When a demurrer is sustained without leave to amend,’ ” and if the
complaint fails to allege facts sufficient to state a cause of action, “ ‘ “we
decide whether there is a reasonable possibility that the defect can be cured
by amendment: if it can be, the trial court has abused its discretion and we
reverse; if not, there has been no abuse of discretion and we affirm.” ’ ”
(Hamrick, supra, 64 Cal.App.5th at p. 763; see City of Stockton v. Superior
Court (2007) 42 Cal.4th 730, 747 (Stockton) [“If the plaintiff has not had an
opportunity to amend the complaint in response to the demurrer, leave to
amend is liberally allowed as a matter of fairness, unless the complaint
shows on its face that it is incapable of amendment”].)
9 We address the legal principles regarding delayed discovery later in
this opinion.
11
B. Analysis
1. Mutual mistake
The superior court erred in concluding that although Kalthia “alleged
sufficient facts to support an ambiguity and resulting mistake” in the
Guaranty, the Guaranty “defines the guarantors as 4S” and “[e]xtrinsic
evidence cannot change this definition.” A court may consider extrinsic
evidence to address and resolve claims of mistake, and, as the court
acknowledged, Kalthia pled the existence of ample evidence demonstrating
that the definition of 4S Foods as Guarantors in the Guaranty is a mistake.
a. Extrinsic evidence may be used to correct mistakes
A court may consider extrinsic evidence in assessing a claim of mistake
and, if applicable, in correcting such a mistake. Hess is instructive on this
point. Hess was rendered paraplegic after an accident in a Ford pickup
truck. (Hess, supra, 27 Cal.4th at p. 521.) He settled with the other driver
and that driver’s insurance company for the $15,000 policy limit, and signed
a boilerplate release that encompassed “all other . . . corporations.” (Ibid.,
italics omitted.) Hess then sued Ford, which learned about the release more
than four years later and obtained summary judgment based on the release.
(Ibid.) Shortly before that summary judgment, Hess filed a separate lawsuit
against the driver and insurer for reformation under Civil Code section 3399,
seeking to strike the “all other” language from the release. (Hess, at p. 521.)
The driver and his insurer admitted the mutual mistake and the court struck
the language. (Ibid.) Hess later secured a new trial against Ford, and
offered testimony from himself, his original attorney, and the claims adjuster
to the effect that he had not intended to release Ford, including his attorney’s
statement that he had purchased the truck to use as evidence in litigation
against Ford, demonstrating that he anticipated further litigation. (Id. at
12
p. 522.) Ford continued to rely on the release to deny liability. The jury
reached a verdict for Hess, and the Court of Appeal affirmed. (Id. at pp. 522-
523.)
The California Supreme Court affirmed the verdict based on mutual
mistake in the language of the release. (Hess, supra, 27 Cal.4th at pp. 526.)
The Court summarized the contractual interpretation principles regarding
mistake, which we have described above. (Id. at p. 524.) The Court then
explained:
“In determining whether a mutual mistake has occurred, a court may
consider parol evidence. [Citation.] Such evidence is admissible to
show mutual mistake even if the contracting parties intended the
writing to be a complete statement of their agreement. (See Code Civ.
Proc., § 1856, subd. (e).) ‘It is the rule that, where the writing itself,
through mistake, does not express the intention of the parties who
entered into it . . . and the writing does not therefore contain the real
contract between the parties, the objection as to parol evidence is
without merit.’ [Citation.] Extrinsic evidence is necessary because the
court must divine the true intentions of the contracting parties and
determine whether the written agreement accurately represents those
intentions.” (Id. at p. 525.)
The Court held that the uncontroverted evidence at trial “establishe[d], as a
matter of law, that the inclusion of contractual language ostensibly releasing
Ford from liability was a mutual mistake.” (Id. at p. 526.)
Accordingly, the superior court in this case erred by concluding that
extrinsic evidence could not change the definition of the Guarantors in the
Guaranty. The court could have, and should have, considered Kalthia’s
proposed extrinsic evidence to ascertain whether the parties really intended
for 4S Foods to guarantee its own lease obligation, or rather, whether their
actual intent was for the individual members of 4S Foods to guarantee that
obligation. If the evidence established that there was a mistake, the court
could revise the Guaranty to correct the definition of “Guarantors.” The court
13
apparently began this analysis, in that it indicated that Kalthia had pled
sufficient allegations of mistake, but the court appeared to believe that it
could not correct the Guaranty based on extrinsic evidence. This was error.
Maddali’s arguments to the contrary lack merit.
First, Maddali concedes that Hess is “instructive for . . . delineating
how courts should treat extrinsic evidence when there are allegations of
mutual mistake,” but contends that Hess does not aid Kalthia. He asserts
that Kalthia “ignores the requirement that plaintiffs must timely seek
reformation of contracts containing a mutual mistake” to obtain relief.
Maddali’s focus on Kalthia’s alleged failure to timely plead reformation
is misguided. For one thing, neither Hess, nor the other cases that Maddali
cites, California Packing Corp. v. Larsen (1921) 187 Cal. 610 and In re
Barton’s Estate (1950) 96 Cal.App.2d 234 (Barton’s Estate), hold that a
plaintiff must formally plead a cause of action for reformation in order to
correct a mistake in a written contract. (Nolan v. City of Anaheim (2004)
33 Cal.4th 335, 343 [“A decision, of course, does not stand for a proposition
not considered by the court”].) Hess secured a reformation judgment, but in a
separate case; in the Ford case, he asserted mutual mistake as a “defense to
[Ford’s] third party beneficiary claim . . . .” (Hess, supra, 27 Cal.4th at p. 516;
id. at p. 525 [explaining that raising mutual mistake as a defense requires
“only alleg[ing] and prov[ing] mutual mistake”.)10 California Packing and
Barton’s Estate also involved litigants in a defensive posture, and the latter
did not address pleading requirements at all. (California Packing, at pp. 610-
612 [affirming judgment for defendant in contractual dispute who raised
10 The Hess Court did not address timing, either, beyond noting that Hess
brought his reformation action shortly before Ford’s summary judgment—
more than four years after the release was signed. (Hess, supra, 27 Cal.4th
at p. 521.)
14
mistake in answer, where evidence supported trial court’s finding of mutual
mistake; noting it was not necessary for defendant to ask for affirmative
relief by way of reformation]; Barton’s Estate, at pp. 235, 239 [affirming
decree setting trustee compensation, where beneficiaries and trustee
“labor[ed] under a mistake of fact” in agreeing to lower amount; citing
“general rule” that, with a material, mutual mistake, “relief will be granted to
the one against whom it is sought to be enforced”].) That a defendant is not
required to ask for reformation does not mean that a plaintiff must expressly
do so.
In any event, even if Kalthia were required to plead reformation, that
would not foreclose relief in this appeal. Our task is to review whether
Kalthia’s allegations “state a cause of action under any legal theory”
(Novartis, supra, 4 Cal.5th at p. 162, italics added), and leave to amend is
liberally allowed. (Stockton, supra, 42 Cal.4th at p. 747.) As we explain in
later sections of this opinion, Kalthia has alleged ample evidence of mutual
mistake, which would support reformation, as well as sufficient evidence of
delayed discovery to preclude sustaining of a demurrer. (§ 3399 [court may
revise contract due to mutual mistake “on the application of a party
aggrieved”]; see Landis v. Superior Court (1965) 232 Cal.App.2d 548, 555
(Landis) [on writ petition, directing trial court to grant leave to amend in
lawsuit over stock sale seeking damages and other relief; allegations were
sufficient to establish grounds for reformation; “[t]hey show[ed]: The real
agreement; the agreement reduced to writing; the mistake, i.e., the defect in
15
the writing and generally how it came about”].)11 In other words, Kalthia
has established that it could amend the FAC to plead reformation. (Hamrick,
64 Cal.App.5th at p. 763.)
Second, Maddali cites Barton’s Estate to suggest that relief for a
material, mutual mistake is limited to defendants, because otherwise lack of
mutual assent would preclude formation of an enforceable contract. Barton’s
Estate did not expressly discuss contract formation (or plaintiffs, as noted
above), and this restriction makes no sense; it would obviate the value of
mutual mistake relief for plaintiffs. (Barton’s Estate, supra, 96 Cal.App.2d at
p. 239; § 3399 [contract may be “revised on the application of a party
aggrieved,” not only defendants].) Courts have permitted plaintiffs to pursue
relief on essential issues such as price and party identity. (See, e.g., Tomas v.
Vaughn (1944) 63 Cal.App.2d 188, 191-192, 197 [affirming judgment for
plaintiff who sought reformation of car sales contract based on mistake and
fraud as to price]; Panterra GP, Inc. v. Superior Court (2022) 74 Cal.App.5th
697, 714, 716 [superior court improperly sustained demurrer to plaintiff’s
reformation claim based on mistake as to party identity].)
Third, Maddali argues that because the Guaranty “unambiguously
defines” Guarantors as 4S Foods, the parol evidence rule applies to bar
extrinsic evidence. But as Hess makes clear, parol evidence is “admissible to
show mutual mistake even if the contracting parties intended the writing to
be a complete statement of their agreement.” (Hess, supra, 27 Cal.4th at
p. 525, citing Code Civ. Proc., § 1856, subd. (e).) Maddali’s argument focuses
11 See Landis, supra, 232 Cal.App.2d at 555 (“While sometimes referred
to as a ‘cause of action,’ reformation is merely one of several remedies for a
single wrong. Where a cause of action is based on failure to perform the
intended agreement, the plaintiff may seek reformation and, in addition,
damages for breach, specific performance, etc.”).
16
on ambiguity, which is a separate basis for allowing parol evidence that we
do not reach. (See Code Civ. Proc. § 1856, subd. (g) [parol evidence rule “does
not exclude . . . evidence of the circumstances under which the agreement
was made . . . or to explain an extrinsic ambiguity”].)
Finally, additional cases that Maddali cites either focus on the
ambiguity issue that we do not reach, or are otherwise distinguishable. (See
George v. Automobile Club of Southern California (2011) 201 Cal.App.4th
1112, 1130, 1132 [affirming judgment after demurrer in insurance dispute;
rejecting allegations of ambiguity, where document was unambiguous, and
noting § 3399 permits revision for mistake, but “bare, conclusory allegations”
were “insufficient to state a cause of action for reformation based on
mistake”]; Smith v. Simmons (E.D.Cal. 2009) 638 F.Supp.2d 1180, 1194, affd.
(9th Cir. 2010) 409 Fed.Appx. 88 [granting summary adjudication to
executive who signed agreement on behalf of corporation, where, among other
things, it did not mention a guaranty or the executive].) Maddali also cites
cases that support Kalthia’s position regarding mistake, by underscoring that
it is unreasonable to have an entity guarantee its own obligation, as we
discuss in the next section. (See Sebastian International, Inc. v. Peck (1987)
195 Cal.App.3d 803, 809 (Sebastian); Home Federal Savings & Loan Assn. v.
Ramos (1991) 229 Cal.App.3d 1609, 1614 (Ramos).)
b. Kalthia pled ample evidence of mistake
Kalthia’s FAC stated that the designation of 4S Foods as “Guarantors”
in the Guaranty is a mistake, and included ample factual allegations to
support this assertion.
First, Kalthia set forth allegations that the parties agreed to personal
guarantees. The FAC alleged that Mitesh told Maddali, Davuluri, and
Vellanki that he would not enter into a commercial lease with a new LLC
17
without a personal guaranty from its members, and that they acknowledged
his concern and agreed to provide personal guaranties. It would not have
made sense for Kalthia to require 4S Foods to guarantee its own obligation.
(See Sebastian, supra, 195 Cal.App.3d 803, 809 [affirming summary
judgment for plaintiff, where corporate officer signed personal guaranty, and
title next to his name on the signature line was “merely descriptive” and did
“not alter his obligation”; “the guaranty would be rendered a nullity if [he]
had signed only in his corporate capacity since the corporation was already
bound”]; Ramos, supra, 229 Cal.App.3d at p. 1614 [“as in Sebastian, . . . to
interpret the document as a guaranty by the corporate principal is objectively
unreasonable because the corporations were already liable”].)12 The FAC
further alleged that when Vellanki withdrew from 4S Foods in 2011, the
withdrawal agreement stated that 4S foods “will request landlord release
from personal guarantee of the current lease”—showing that the LLC
members believed that they were personal guarantors of the lease after they
signed it. (Cf. Hess, supra, 27 Cal.4th at p. 526 [“The purchase of the Ford
truck by Hess’s attorney after agreeing to the settlement further confirms
that Hess did not intend to release Ford”].)
Second, the FAC attached copies of the Guaranty and Lease, which
both supply evidence of mistake. The Guaranty states that the Lessor “would
not execute the Lease if Guarantors did not execute and deliver” the
Guaranty, which is consistent with Mitesh telling Maddali and the others
that he would not enter into a lease without personal guaranties. The
12 As Hess makes clear, the extrinsic evidence can illuminate the “true
intentions of the contracting parties . . . .” (Hess, supra, 27 Cal.4th at p. 525;
see id. at p. 527 [“the small amount of the settlement—$15,000—despite the
severity of Hess’s injuries strongly suggests that the Release did not cover
Ford”].)
18
Guaranty also defines 4S Foods as “Lessee,” and then states that “4S Foods,
LLC hereinafter referred to as ‘Guarantors’ have a financial interest in
Lessee”—meaning that, if “Guarantors” actually were 4S Foods, the
Guaranty would nonsensically state that 4S Foods had a financial interest in
itself. As noted above, there are other instances where the Lessee and
Guarantors are discussed in the same sentence; such terms presumably refer
to different entities or persons. Further, as noted, the term Guarantors is
plural, which tracks with each of the LLC members providing a personal
guaranty, not the LLC entity. And, in the signature block, the members
signed just their names, with no mention of 4S Foods. Similarly, Section 1.9
of the Lease states “Tenant’s Guarantor: ALL PARTNERS OF LW . . . ,” but
“LW” has no apparent meaning. The parties may have meant to say “ALL
PARTNERS OF LLC” (as the earlier versions of the Lease stated), which is
similar to “all members of LLC.”
Third, Kalthia’s allegations “explain[ed] how the mistake occurred.”
(Hess, supra, 27 Cal.4th at p. 526.) Maddali filled in a standard form for the
Guaranty, and although Mitesh confirmed that all three 4S Foods members
had signed when he received the Guaranty, he did not notice that Maddali
had incorrectly designated 4S Foods as Guarantors in the text. The parties
also used a standard form for the Lease, and neither Mitesh, nor Maddali,
caught the error regarding the guarantor there, either. Even if Mitesh’s
actions on behalf of Kalthia were careless, “ordinary negligence will not bar a
claim of mutual mistake because ‘[t]here is an element of carelessness in
nearly every case of mistake.’ ” (Id. at 529.) Rather, “[o]nly gross negligence
or ‘preposterous or irrational’ conduct will preclude a finding of mutual
mistake.” (Ibid. [plaintiff was “at most, guilty of ordinary negligence” in
“mistakenly us[ing] boilerplate form with overly broad language”]; see id. at
19
p. 526 [“[w]hile the failure of both sides to catch the erroneous language
under these circumstances may not be excusable, it is hardly uncommon”].)
Maddali suggests that Kalthia’s allegations are inadequate, because
mutual assent requires “objective . . . manifestations” and the mistake
alleged in this case is “based on the parties’ subjective intent regarding who
should have been designated as the guarantor . . . .” We are not persuaded.
In Hess, the Court rejected a similar argument by Ford that the trial
testimony “represented the contracting parties’ subjective intent.” (Hess,
supra, 27 Cal.4th at p. 528.) The Court explained that this argument “makes
no sense,” because intent is “necessarily subjective,” and stated that “the
contracting parties did not simply offer subjective opinions about the scope of
the Release but related objective facts surrounding their negotiations . . . .”
(Ibid. [testimony described “disclosed intentions”].) Kalthia’s FAC likewise
alleged objective, disclosed evidence of intent, including Mitesh’s statement to
Maddali and the others that he would require personal guaranties; their
agreement to provide personal guaranties; the Guaranty and Lease language;
and the language of Vellanki’s withdrawal agreement.
2. Statute of limitations and delayed discovery
The superior court also erred by impliedly finding that any claim of
mistake was untimely, because “the parties had the guaranty in their
possession almost five years before the default.” In making this finding, the
court improperly resolved a disputed factual issue at the pleading stage, i.e.,
whether Kalthia should have discovered the mistake sooner.
a. Additional legal principles
“Code of Civil Procedure section 338, subdivision (d) sets forth a three-
year statute of limitations for ‘[a]n action for relief on the ground of fraud or
mistake.’ That provision further states that ‘[t]he cause of action in that case
20
is not deemed to have accrued until the discovery, by the aggrieved party, of
the facts constituting the fraud or mistake.’ (Code Civ. Proc., § 338,
subd. (d).)” (Krolikowski v. San Diego City Employees’ Retirement System
(2018) 24 Cal.App.5th 537, 557, fn. 10 (Krolikowski).)
“ ‘Although the statute does not expressly provide that the claim will
accrue based upon either actual or inquiry notice of the claimant, California
courts have long construed it in such a fashion.’ [Citation.] As our Supreme
Court has long held, under Code of Civil Procedure section 338, subdivision
(d), a ‘plaintiff must affirmatively excuse his [or her] failure to discover the
fraud [or mistake] within three years after it took place, by establishing facts
showing that he [or she] was not negligent in failing to make the discovery
sooner and that he [or she] had no actual or presumptive knowledge of facts
sufficient to put him [or her] on inquiry.’ [Citation.] When inquiry notice
applies, ‘if [a party] became aware of facts which would make a reasonably
prudent person suspicious, [the party] had a duty to investigate further, and
[is] charged with knowledge of matters which would have been revealed by
such an investigation.’ ” (Krolikowski, supra, 24 Cal.App.5th at pp. 561-562;
see Creditors Collection Service v. Castaldi (1995) 38 Cal.App.4th 1039, 1044
[“Code of Civil Procedure section 338, subdivision (d) specifically provides
that a cause of action for relief based on mistake does not accrue until the
aggrieved party discovers the facts constituting the mistake,” meaning that a
“ ‘cause of action for . . . mistake accrues, and the limitations period
commences to run, when the aggrieved party could have discovered the . . .
mistake through the exercise of reasonable diligence,’ ” citing Sun ’n Sand,
Inc. v. United California Bank (1978) 21 Cal.3d 671, 701].)
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
21
to show (1) the time and manner of discovery and (2) the inability to have
made earlier discovery despite reasonable diligence.’ ” (Fox v. Ethicon Endo-
Surgery, Inc. (2005) 35 Cal.4th 797, 807 (Fox).) “ ‘When a plaintiff reasonably
should have discovered facts for purposes of the . . . delayed discovery rule is
generally a question of fact, properly decided as a matter of law only if the
evidence (or, in this case, the allegations in the complaint . . . ) can support
only one reasonable conclusion.’ ” (Alexander v. Exxon Mobil (2013)
219 Cal.App.4th 1236, 1252 (Alexander).)
“ ‘A demurrer based on a statute of limitations will not lie where the
action may be, but is not necessarily, barred. [Citation.] 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 that the action may be barred.’ ” (Geneva Towers Ltd.
Partnership v. City and County of San Francisco (2003) 29 Cal.4th 769, 781
(Geneva Towers); see E-Fab, Inc. v. Accountants Inc. Services (2007)
153 Cal.App.4th 1308, 1320 (E-Fab) [on appeal from judgment of dismissal
following demurrer involving allegedly belated discovery, “ ‘the issue is
whether the trial court could determine as a matter of law that failure to
discover was due to failure to investigate or to act without diligence’ ”].)
b. Analysis
The FAC contains allegations that Kalthia discovered the mistake
during this litigation, and did not unreasonably fail to do so sooner.
Kalthia sued for breach of written guaranty in January 2017. In
October 2019, Maddali filed his nonstatutory motion for judgment on the
pleadings, citing the definition of 4S Foods as Guarantors in the Guaranty.
Kalthia filed its FAC the following month, alleging that there was a mistake
in the designation of Guarantors. The FAC asserted that when Mitesh
22
received the Guaranty, he confirmed that all three members of 4S Foods had
signed and did not notice the error in the Guarantors designation, and that
neither he, nor Maddali, noticed the error in the guaranty section of the
Lease. The FAC also described other events that either confirmed that the
personal guaranties were in place (Vellanki’s withdrawal agreement in 2011),
or gave Kalthia no reason to revisit the documents (e.g., the 5-year lease
extension in 2015). Even after 4S Foods stopped paying rent in 2016, leading
to the unlawful detainer proceedings, Kalthia did not necessarily have any
reason to suspect that the members would dispute their personal guaranties
or that they had any basis to do so. Rather, Kalthia alleged that it did not
become aware that the members denied that they were personal guarantors
until this litigation began—meaning that Kalthia discovered their position,
and the mistake in the Guaranty, during this litigation.
These allegations, if proven, are sufficient to establish when and how
Kalthia discovered the mistake, and could support a finding that Kalthia was
not aware of facts that reasonably should have led to earlier discovery. (See
Fox, supra, 35 Cal.4th at p. 807; Alexander, supra, 219 Cal.App.4th at
p. 1252; cf. Krolikowski, supra, 24 Cal.App.5th at pp. 562-563 [affirming
judgment for plan administrator in action contesting pension recoupment,
where there was no evidence administrator was aware of facts prior to audit
and recoupment process that “should have reasonably made it suspicious that
[the] pension benefits had been incorrectly calculated”].) Accordingly, the
superior court could not conclude as a matter of law that Kalthia’s allegations
of mistake were untimely, and it erred by impliedly sustaining the demurrer
on timeliness grounds. (Geneva Towers, supra, 29 Cal.4th at p. 781; E-Fab,
supra, 153 Cal.App.4th at p. 1320.)
Maddali’s arguments on this issue lack merit.
23
First, Maddali contends that the FAC did not allege facts regarding the
“time and manner of . . . discovery” of the mistake. We disagree. As we
explained in the factual background, Paragraph 21 of the FAC alleged, in
substance, that the 4S members had not denied that they signed as personal
guarantors until this litigation, but that the word “denied” was omitted. We
disagree with Maddali that Kalthia’s discussion of such denial in its briefing
amounts to improperly “rewrit[ing]” the FAC. Even if the allegation were
unclear, Kalthia has established that it could provide adequate clarification
by amendment. (See Hamrick, 64 Cal.App.5th at p. 763.)
Second, Maddali argues that “it cannot be disputed that Kalthia was
well aware of facts which would make a reasonably prudent person
suspicious” when it received the Guaranty, and that it should be charged
with knowledge of the mistake. These facts purportedly include the failure of
the 4S Foods’s members to provide the Guaranty until several months into
the lease term, despite Kalthia requiring personal guaranties to enter the
lease; Davuluri “serving as a conduit for his wife [Chitturi] in making
promises to personally guaranty (sic) the lease”; and the fact that Mitesh had
scrutinized the Lease and its addendum, leading to “several exchanges” over
the parties’ names in the lease.
But Kalthia does dispute that it should have been aware of the mistake
sooner and has pled sufficient allegations supporting its position. This is
therefore an issue for a factfinder, not demurrer. (Geneva Towers, supra,
29 Cal.4th at p. 781; E-Fab, supra, 153 Cal.App.4th at p. 1320.) Further, the
instances cited by Maddali simply are not indisputably suspect. Kalthia
alleged that Mitesh accepted Maddali’s promise to return the signed
guaranty, citing “[c]ustomary . . . Indian culture” and the assurances to
provide personal guaranties during negotiations—so the delayed delivery of
24
the Guaranty and Chitturi serving, and signing, as the LLC member rather
than Davuluri did not necessarily call that promise into question. Nor does
the fact that Mitesh requested corrections to earlier versions of the Lease
mean that his failure to catch the mistake in the Guaranty was
unreasonable. Mitesh did review the Guaranty, and confirmed that all three
members of 4S Foods had signed. Further, the final Lease version still
contained a mistake that neither side caught (“LW” instead of “LLC”). (See
Krolikowski, supra, 24 Cal.App.5th at p. 562 [rejecting argument that plan
administrator “always had available” the information to correctly determine
the benefits].)
North Star Reinsurance Corp. v. Superior Court (1992) 10 Cal.App.4th
1815, cited by Maddali, is distinguishable. There, the plaintiff sought
reformation of an insurance policy and the insurer asserted that the claim
was time-barred, citing a letter that it had sent three years earlier that
identified the policy exclusions. (Id. at pp. 1819-1820.) After the superior
court denied summary judgment to the insurer, the Court of Appeal granted
writ relief, stating that there “cannot be any factual dispute . . . that [the
insured] discovered ‘the facts constituting the . . . mistake’ ” when it received
the letter. (Id. at pp. 1822-1823.) Here, in contrast, there is no indication
that Maddali or the other members ever communicated to Kalthia that they
were not personal guarantors, prior to this litigation.13
13 Maddali also cites Hulsey v. Elsinore Parachute Center (1985)
168 Cal.App.3d 333, 339 for the proposition that absent “fraud, overreaching
or excusable neglect,” one “who signs an instrument may not avoid the
impact of its terms on the ground that he failed to read” it. Hulsey did not
involve mutual mistake, and is otherwise inapposite. (Id. at p. 336 [affirming
summary judgment for defendant in personal injury action, where plaintiff
signed liability waiver].)
25
Third, Maddali contends that events after delivery of the Guaranty also
should have led Kalthia to discover the mistake, such as Vellanki’s
withdrawal in 2011; 4S Foods’s lease extension in 2015; its business
difficulties, the unlawful detainer proceedings, and the trashing of the
property; and events in and after January 2017, including the filing of this
lawsuit. The FAC was filed in November 2019, within three years of the
events in 2017 (so would still be timely), and the other factual issues cannot
be resolved on demurrer. (§ 338, subd. (d); see Geneva Towers, supra,29 Cal.4th at p. 781.) Further, some of these facts support Kalthia’s position,
or at least are consistent with it. For example, Vellanki’s withdrawal
agreement reflected that the members of 4S Foods still believed that their
personal guaranties were in place, and the lease extension provided no
reason to review the Guaranty.
As for the business difficulties experienced by 4S Foods, they were not
necessarily suspect, either. Maddali contends that “Kalthia expressly admits
it had suspicion the guaranties were not in place after 4S Foods breached the
lease,” citing Paragraph 15 of Kalthia’s original complaint and page 54 of its
opening brief. Neither document contains such an admission. Paragraph 15
of the original complaint discussed Kalthia’s recovery of possession and
asserted entitlement to relief. Page 54 of Kalthia’s opening brief states
(continuing onto page 55):
“[Kalthia] only become [sic] aware that Maddali and Chitturi were
asserting otherwise [i.e., that there was no personal guaranty] after
4S Foods defaulted and vacated the premises, once Kalthia sued on the
guaranties. Prior to the breach of lease obligations, Kalthia had no
suspicion that guaranties were not in place and, further, it had suffered
no damages until 4S Food defaulted from its monetary obligations
(which then led to its attempted recourse against the guarantors in
light of 4S Foods’ insolvency).”
26
Kalthia’s point appears to be that, until the lease was breached, there was no
reason to pursue enforcement of the Guaranty or to suspect that the personal
guaranties might not be in place—not that the breach of the lease itself
triggered such suspicion.
Maddali also argues that Kalthia’s “retain[ing] counsel to serve the
3 day notice and/or file the UD action” should have led to discovery of the
mistake, citing Lazzarevich v. Lazzarevich (1952) 39 Cal.2d 48. Kalthia filed
the unlawful detainer action against 4S Foods directly, to regain possession
of the property. It does not follow that the attorney would have been aware
of the Guaranty or have had any reason to review it. (See Larson v. City and
County of San Francisco (2011) 192 Cal.App.4th 1263, 1297 [unlawful
detainer actions are “of limited scope, generally dealing only with the issue of
right to possession”]; compare Lazzarevich, at p. 50 [affirming judgment for
former wife, in plaintiff’s action to set aside assignment of real property
interest based on his mistaken belief that they were still married; his
attorney obtained the final divorce judgment, and “[o]rdinarily, a person is
held to know what his attorney knows”].)
We conclude that the superior court erred by sustaining the demurrer
without leave to amend, and that the judgment of dismissal must be
reversed.
3. Attorney fees order
Kalthia’s sole contention regarding the attorney fees order is that if we
reverse the judgment, we should reverse the order. Maddali does not dispute
Kalthia’s position, and we concur. (See Allen v. Smith (2002) 94 Cal.App.4th
1270, 1284 [“ ‘An order awarding costs falls with a reversal of the judgment
on which it is based’ ”].)
27
DISPOSITION
The judgment and attorney fees order are reversed. Kalthia shall
recover its costs on appeal.
AARON, J.
WE CONCUR:
HUFFMAN, Acting P. J.
IRION, J.
28