SI 59 LLC v. Variel Warner Ventures, LLC ( 2018 )

Filed 11/15/18
CERTIFIED FOR PUBLICATION
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
SECOND APPELLATE DISTRICT
DIVISION TWO
SI 59 LLC, B285086
Plaintiff and Appellant, (Los Angeles County
Super. Ct. No. BC646851)
v.
VARIEL WARNER VENTURES,
LLC et al.
Defendants and Respondents.
APPEAL from a judgment of the Superior Court of
Los Angeles County. Barbara Ann Meiers, Judge. Affirmed.
Greenfield Draa Harrington and Brian John Hannon for
Plaintiff and Appellant.
Hodel Wilks, Matthew A. Hodel, Frederick L. Wilks,
Ashley E. Merlo; Sellar Hazard & Lucia, Christian P. Lucia and
Karin L. Landry for Defendants and Respondents.
_________________________
SI 59 LLC (appellant) appeals from a judgment of dismissal
following a demurrer to its Second Amended Complaint (SAC) by
Variel Warner Ventures, LLC (Variel Warner), Variel Builders,
LLC, (Variel Builders), Verdugo Management & Investment, Inc.
(Verdugo), Troxler Residential Ventures XIX, LLC (Troxler), and
Troxler Venture Partners, Inc. (Troxler Venture) (collectively
respondents). Also, appellant appeals the postjudgment award of
$81,420.25 in attorney fees to Variel Warner, Variel Builders,
Troxler, and Troxler Venture. Appellant posits that the trial
court erred when it ruled that the SAC was barred by a general
release, and that appellant is not entitled to a declaration that
the general release is unenforceable pursuant to Civil Code
section 1668.1 In the alternative, appellant avers that the trial
court abused its discretion by not granting leave to amend the
pleading, and that it violated appellant’s due process right to
notice and an opportunity to be heard by raising new cases and
issues at the demurrer hearing. If we reverse the dismissal,
appellant asks that we reverse the award of attorney fees. We
find no error and affirm.
In affirming, we hold that section 1668 negates a
contractual clause exempting a party from responsibility for
fraud or a statutory violation only when all or some of the
elements of the tort are concurrent or future events at the time
the contract is signed. Contrariwise, we hold that section 1668
does not negate such a clause when all the elements are past
1 All further statutory references are to the Civil Code unless
otherwise indicated.
Section 1668 establishes that a contract that exempts
anyone from responsibility for his or her own fraud or violation of
the law is against public policy.
2
events. Regarding the element of damages, which is necessary
for tort liability, this means that at least some form of economic
or physical damage has occurred.
FACTS
The SAC
The SAC alleged: Variel Warner, Variel Builders, Troxler
and Troxler Venture are affiliated with each other. The precise
nature of their affiliation is unknown. Verdugo is a general
building contractor.
In 2005, Variel Warner entered into a general construction
contract with Verdugo to construct improvements at an 85-unit
apartment complex (Property). Under the terms of the general
construction contract, Verdugo agreed to construct the
improvements in a good and workmanlike manner in strict
compliance with all drawings and specifications. Verdugo also
agreed to comply with all laws. It proceeded to construct the
improvements. In doing so, it employed subcontractors to
construct the structural concrete slab and then waterproof it.
The work of the subcontractors was defective because, inter alia,
they violated the California Building Code sections pertaining to
flashing, counterflashing, waterproofing, and roof membranes.
The City of Los Angeles issued a Certificate of Occupancy
for the Property on December 6, 2007.
On December 17, 2007, Sobrato Interests III (Sobrato)
entered into an agreement (Purchase Agreement) to acquire the
Property from Variel Warner. Per the Purchase Agreement,
Sobrato was not obligated to close escrow until “Final
Completion,” which was defined to mean, among other things:
“(i) all Improvements have been constructed in substantial
accordance with all plans and specifications and other applicable
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provisions of the General Construction Contract . . . and [Sobrato]
has been notified that completion of construction has occurred,
. . . [and] (v) all requirements in the General Construction
Contract for final completion to have occurred thereunder shall
have occurred. . . .”
The Purchase Agreement contained a general release
stating that Sobrato “shall rely solely upon [its] own knowledge of
the Property based on its investigation of the Property and its
own inspection of the Property in determining the Property’s
physical condition, except with respect to . . . [the]
representations, warranties and covenants [made by Variel
Warner in the Purchase Agreement]. . . .” Sobrato released, inter
alia, Variel Warner, Variel Builders, Troxler, Troxler Venture,
and Verdugo (except to the extent of Verdugo’s general contractor
warranty) from all claims arising out of any condition of the
Property, including construction errors, omissions or defects.
Excluded from the release were any claims that Sobrato may
have against Variel Warner for breach of the representations,
warranties and covenants in the Purchase Agreement or for
fraud.
Prior to escrow, Variel Warner “represented to Sobrato that
final completion of construction had occurred and that all
requirements of the General Construction Contract for final
completion had been satisfied.” Variel Warner knew or should
have known the representations were untrue. Sobrato
reasonably relied on these representations by proceeding with the
close of escrow.
In 2008, Sobrato assigned all of its interests in the Property
to SI XX, LLC. In 2015, SI XX, LLC assigned all of its interests
in the Property to appellant. SI XX, LLC and appellant observed
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water leaking from the podium and pool deck into the parking
garage and causing damage.
Against all respondents, the SAC alleged causes of action
for negligence and declaratory relief. Against Variel Warner,
Variel Builders, Troxler and Troxler Venture, the SAC also
alleged breach of contract.
The negligence cause of action posited that Verdugo
negligently constructed or inspected the structural concrete slab
and slab waterproofing, and that Variel Warner, Variel Builders,
Troxler and Troxler Venture negligently managed, inspected and
developed the Property. Because the negligence cause of action
incorporated the SAC’s general allegations, it included the
allegation that Variel Warner made a negligent representation.
The breach of contract cause of action alleged that Variel
Warner, Variel Builders, Toxler and Troxler Venture breached
the Purchase Agreement by failing to deliver the Property with
all improvements having been “constructed in substantial
accordance with all plans and specifications” and “the General
Construction Contract.”
Finally, the SAC sought a declaration that section 1668
renders the general release unenforceable because it purports to
exempt respondents from responsibility for their statutory
violations and fraud.
Trial Court Proceedings
Respondents demurred to the negligence and breach of
contract causes of action on the ground they were barred by the
general release, and to the declaratory relief cause of action
based on the absence of a present controversy regarding the
application of section 1668.
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At the hearing, sua sponte, the trial court raised two cases
it believed were controlling: Lingsch v. Savage (1963) 213
Cal. App. 2d 729 (Lingsch) and Orlando v. Berkeley (1963) 220
Cal. App. 2d 224 (Orlando). It interpreted those cases to mean
that section 1668 prohibits a contract that exempts a party from
responsibility for its fraudulent failure to disclose a condition
that was not observable to the other party. In contrast, the trial
court interpreted those cases to hold that section 1668 does not
prohibit a contract that exempts a party from responsibility for
misrepresentation, whether it is intentional or negligent. The
trial court concluded that because appellant did not plead
fraudulent nondisclosure, it did not plead around the general
release and therefore did not successfully plead causes of action
for negligence, breach of contract and declaratory relief.
Also sua sponte, the trial court raised the issue of whether
Sobrato’s fraud cause of action was assignable and whether it
had, in fact, been assigned.
When appellant’s counsel suggested that section 1668
rendered the general release unenforceable to the degree it
purported to exempt respondents from negligent violations of the
building code, the trial court replied, “No, not in this context, not
according to those cases.” It concluded that Lingsch and Orlando
cover the application of section 1668 to contracts concerning “as
is” sales of property.2
During the hearing, the trial court recognized that it had
raised issues without notice, and that it should allow appellant to
supplement its papers. At one point, the trial court gave the
parties an opportunity to read Lingsch and Orlando and then
2 The parties do not dispute that the Purchase Agreement
provided for an “as is” sale.
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argue them. Regarding the assignment issue, it stated, “[I]t
might mean that [appellant] would have to go and get an
assignment from their seller of all claims . . . , but that would
come with leave to amend because the [trial court] has interjected
these issues by giving you [Lingsch and Orlando].” Then the trial
court stated that the parties needed to shepardize Lingsch and
Orlando, adding, “I’ll give you a chance to have a further hearing
on this point[.]” According to the trial court, it planned to be
guided by Lingsch. Nonetheless, it explained that it would take
the matter under submission for 10 days, and said, “File
whatever you want. And if I don’t hear anything from anybody,
then I’m going to make a ruling[.]”
Neither party filed supplement briefs.
The trial court sustained the demurrer without leave to
amend and “dismissed the action without prejudice to [appellant]
seeking reconsideration if appropriate within the time frame
provided by law.” The minute order explained that appellant
failed to plead facts showing a knowing and intentional failure to
disclose existing negative conditions at the time of the general
release, as required by Lingsch and Orlando. It added that
“[t]hese cases . . . rely upon the element of fraud as a necessary
factor to be proven before the elimination of the efficacy [of the
general release] can be established[.]” Last, it averred that
appellant failed to show that a fraud claim can be or has been
assigned.
Appellant appealed the judgment.
Attorney Fees
The trial court awarded $81,420.25 in attorney fees to
Variel Warner, Variel Builders, Troxler and Troxler Venture.
Appellant appealed the award.
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DISCUSSION
I. Standard of Review.
We apply de novo review to an order sustaining a
demurrer. A trial court’s decision to deny leave to amend will be
left undisturbed unless we conclude that there was an abuse of
discretion. (Aubry v. Tri-City Hospital Dist. (1992) 2 Cal. 4th 962,
966–967; Montclair Parkowners Assn. v. City of Montclair (1999)
76 Cal. App. 4th 784, 790.)
II. Section 1668.
Section 1668 provides: “All contracts which have for their
object, directly or indirectly, to exempt anyone from responsibility
for his own fraud, or willful injury to the person or property of
another, or violation of law, whether willful or negligent, are
against the policy of the law.”
The statute prohibits exculpation from future torts. In fact,
multiple cases state that the statute applies only if a future tort
is involved. (Health Net of California, Inc. v. Department of
Health Services (2003) 113 Cal. App. 4th 224, 227 [section 1668
prevents a party from imposing a contractual prohibition against
the recovery of damages for any future violations of statutory or
regulatory law]; Frittelli, Inc. v. 350 North Canon Drive, LP
(2011) 202 Cal. App. 4th 35, 43 [“[T]he public policy disfavoring
attempts by contract to limit liability for future torts . . . finds
expression in” section 1668]; Watkins v. Wachovia Corp. (2009)
172 Cal. App. 4th 1576, 1587, fn. 12 [section 1668 only applies to
contracts that release liability for future torts].)
Whether section 1668 might apply to past torts is a slippery
question. It has been applied to negate exemption clauses that
would otherwise proscribe liability for fraudulent inducement of
the very contracts with the exemption clauses. (Blankenheim v.
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E. F. Hutton & Co. (1990) 217 Cal. App. 3d 1463, 1471—1473
(Blankenheim) [plaintiffs were fraudulently induced into signing
agreements with hold harmless clauses; section 1668 prevented
the defendant from relying on the hold harmless clauses to
exempt it from “responsibility for its own misrepresentations”];
Simmons v. Ratterree Land Co. (1932) 217 Cal. 201, 204 [citing
section 1668 and stating “a seller cannot escape liability for”
fraudulent inducement of a contract by inserting a release of
liability into the contract].) Undeniably, fraudulent inducement
occurs before a contract is signed. But the reliance is not a past
event; the reliance is the signing of the contract and the changing
of legal positions, which is concurrent with the exemption
clauses. Moreover, the damages are either concurrent or
prospective. Therefore, in a real sense, the fraud in cases like
Blankenheim cannot be considered past torts given that the
reliance and damages elements of fraud cannot possibly be past
events. (Alliance Mortgage Co. v. Rothwell (1995) 10 Cal. 4th
1226, 1239 [reliance and damages are elements of a fraud claim].)
We are not aware of any case law applying section 1668 to torts
where all elements are past events. Under these circumstances,
we follow the weight of authority recognizing that section 1668
applies only to concurrent or future torts.
Appellant suggests that Halliday v. Greene (1966) 244
Cal. App. 2d 482 (Halliday) establishes that section 1668 applies
to proscribe limitations on liability for past statutory violations.
Appellant misreads the case. In that case, a contractor built an
apartment complex, sold it, and leased it back from the buyer as
a general lessee. The plaintiffs entered into a sublease that
contained a hold harmless clause. Subsequently, the complex
caught fire. The plaintiffs fell on or near an exterior staircase
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while evacuating from their apartment and suffered injuries.
They sued the contractor for, inter alia, negligent construction
and design of the staircase. The trial court granted nonsuit after
finding that the hold harmless clause precluded recovery. (Id. at
p. 485.) Because the construction defect constituted a violation of
a safety order, the reviewing court concluded that section 1668,
rendered the hold harmless clause ineffective. (Halliday, supra,
at p. 488.)
Halliday offers appellant no assistance. Although the
negligent construction of the stairway preceded the hold
harmless clause, there was a continuing dangerous condition.
More importantly, that dangerous condition did not cause harm
to the plaintiffs until after the hold harmless clause was
executed. Thus, for purposes of section 1668, the negligence in
Halliday was a future tort because the causation and damages
elements were future events.
III. Sufficiency of the Negligence Allegations.
The negligence cause of action contains two claims, one for
negligence and one for negligent misrepresentation. As we
discuss below, the negligence claim is barred by the general
release and the negligent misrepresentation claim is not pleaded
with the requisite specificity. Consequently, the demurrer was
properly sustained.
A. Negligence.
Based on the allegations, Variel Warner was economically
damaged when Verdugo and the subcontractors negligently
constructed and waterproofed the structural concrete slab by
failing to comply with the building code. Whether Variel Warner
knew it at the time, the Property’s value was diminished due to
the defects. Thus, for purposes of public policy under section
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1668, the alleged negligent noncompliance with the law as well as
some damages were past events when Sobrato signed the
Purchase Agreement. In this context, it does not matter that the
negligence may have had future consequences. The result is that
section 1668 does not prohibit application of the general release
as it relates to that negligence.
The alleged negligence of Variel Warner, Variel Builders,
Troxler and Troxler Venture in failing to inspect, manage and
develop the property was, if anything, a breach of a common law
duty of care rather than a statutory violation. As a matter of
public policy, there is a difference between Verdugo and the
subcontractors directly violating the law versus Variel Warner,
Variel Builders, Troxler and Troxler Venture failing to detect
that violation. Therefore, as to this alleged negligence, the
general release is enforceable.
Appellant suggests that it can sue Verdugo because it
obtained an assignment of rights that came from Variel Warner
through Sobrato and SI XX, LLC. This argument is a
non sequitur. The general release limits Verdugo’s liability to its
general contractor warranty.
B. Negligent Misrepresentation.
Negligent misrepresentation requires an assertion of fact,
falsity of that assertion, and the tortfeasor’s lack of reasonable
grounds for believing the assertion to be true. It also requires the
tortfeasor’s intent to induce reliance, justifiable reliance by the
person to whom the false assertion of fact was made, and
damages to that person. (B.L.M. v. Sabo & Deitsch (1997) 55
Cal. App. 4th 823, 834.) An implied assertion of fact is “not
enough” to support liability. (Wilson v. Century 21 Great Western
Realty (1993) 15 Cal. App. 4th 298, 306.)
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Contrary to what the trial court concluded, section 1668
does apply to nullify the general release of the negligent
misrepresentation cause of action. (Blankenheim, supra, 217
Cal.App.3d at pp. 1471–1473.)3 Respondents do not dispute this.
The question remains, however, whether the demurrer was
nonetheless properly sustained because appellant failed to
otherwise allege sufficient facts to state a cause of action for
negligent misrepresentation.
Though respondents suggest to the contrary, the SAC
alleges an assertion of fact. Because “Final Completion” was
defined in the Purchase Agreement to mean that the Property
had been built in substantial compliance with the plans,
specifications and provisions of the construction contract, Variel
Warner’s alleged assertion of “Final Completion” was a
shorthand assertion that the defined substantial compliance had
in fact occurred. In other words, the assertion was not implied; it
had an agreed meaning.
But there are several problems for appellant. Number one,
the cause of action was not alleged with sufficient particularity
because it did not identify, among other things, who made the
representation on behalf of Variel Warner. (Charnay v. Cobert
(2006) 145 Cal. App. 4th 170, 184–185, fn. 14 (fraud and negligent
misrepresentation must be pleaded with particularity, with facts
showing “‘“how, when, where, to whom, and by what means the
3 Lingsch and Orlando analyzed the scope of “‘as is’” clauses
in real estate transactions and interpreted them so as not to
conflict with the policy embodied in section 1668. (Lingsch,
supra, 213 Cal.App.2d at p. 742 [an as is provision “is ineffective
to relieve the seller of either his ‘affirmative’ or ‘negative’ fraud”];
Orlando, supra, 220 Cal.App.2d at pp. 228–229.) They are
consistent with Blankenheim.
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representations were tendered”’”].) Number two, there was no
allegation as to why Variel Warner reasonably should have
known the representation was false.
IV. Breach of Contract.
Based on section 1668, appellant argues that the general
release does not bar the breach of contract claim because the
breach was accompanied by a negligent misrepresentation that
there was final completion. But the alleged breach—failure to
deliver the Property in compliance with the plans, specifications
and the requirements of the general construction contract—was
not itself a negligent misrepresentation. Thus, section 1668 is
not triggered in this context. It was appropriate for the trial
court to sustain the demurrer.
V. Declaratory Relief.
Given that the negligence and breach of contract claims are
defective, and given that the SAC does not establish that the
general release is unenforceable, appellant was not entitled to
declaratory relief in its favor. Moreover, the trial court was not
required to issue a declaration that the general release is, in fact,
enforceable. (Collins v. Collins (1957) 48 Cal. 2d 325, 333 [where
a ruling on one cause of action resolved a controverted issue
against plaintiff, declaratory relief regarding that same issue was
not required].)
We conclude that the demurrer was properly sustained as
to declaratory relief.
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VI. Denial of Leave to Amend.
Appellant suggests the trial court abused its discretion
when it declined to allow appellant to amend its pleading. The
suggestion does not prevail.
The negligence and breach of contract claims are barred by
the general release. As for the negligent misrepresentation and
declaratory relief causes of action, we do not see how their defects
can be ameliorated.
We note that appellant informs us that, given a chance, it
would allege that on December 10, 2007, Mac Chandler
(Chandler), acting on behalf of Variel Warner, sent an e-mail to
Sobrato agents stating that “on Thursday [December 13, 2007],
we anticipate sending you a notice that [Variel] has met the
conditions of final completion.” But appellant does not indicate
that Chandler ever sent the notice of Final Completion to
Sobrato. In our view, Chandler’s statement about anticipating
sending notice of Final Completion does not equate to actual
notice of Final Completion. In other words, it is merely a
statement of his anticipation; it is not a statement that Final
Completion had occurred.
Another problem is the justifiable reliance element. In the
Purchase Agreement, Variel Warner expressly disclaimed
“Knowledge of any material default” by Variel Warner, thereby
disclaiming any knowledge of the condition of the Property. The
Purchase Agreement also expressly tasked Sobrato with
conducting its own investigation and inspection in determining
the physical condition of the Property. Thus, even if Variel
Warner misrepresented final completion, appellant has not
established—by argument or by authority on point—that its
reliance could be justified in the face of the foregoing provisions.
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We need not analyze this issue further because “[i]t is not our
responsibility to develop an appellant’s argument.” (Alvarez v.
Jacmar Pacific Pizza Corp. (2002) 100 Cal. App. 4th 1990, 1206, fn. 11.)
VII. Due Process.
According to appellant, the trial court denied it due process
when it sustained the demurrer based solely on cases and issues
raised sua sponte by the trial court at the demurrer hearing.
(Traverso v. People ex rel. Dept. of Transportation (1993) 6
Cal. 4th 1152, 1169 [due process requires, at a minimum, notice
and an opportunity to be heard].) We disagree. The trial court
provided appellant with a 10-day opportunity to supplement its
briefing. Appellant cannot be heard to complain after it did not
embrace the opportunity.
VIII. Attorney Fees.
Given that we are affirming the judgment of dismissal, the
issue of attorney fees is moot.
DISPOSITION
The judgment is affirmed. Respondents shall recover their
costs on appeal.
CERTIFIED FOR PUBLICATION.
_____________________, Acting P. J.
ASHMANN-GERST
We concur:
____________________, J. ____________________, J.
CHAVEZ HOFFSTADT
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