Seretti v. Augustine CA2/3 ( 2021 )

Filed 3/24/21 Seretti v. Augustine CA2/3
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IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
SECOND APPELLATE DISTRICT
DIVISION THREE
PHILLIP SERETTI, as Trustee, etc., B293621
Plaintiff and Appellant, Los Angeles County
Super. Ct. No. BC576221
v.
MICHAEL AUGUSTINE,
as Trustee, etc., et al.,
Defendants and Respondents.
APPEAL from a judgment of the Superior Court of
Los Angeles County, Victor E. Chavez, Judge. Affirmed.
Law Offices of Roger N. Golden and Roger N. Golden
for Plaintiff and Appellant.
Gutman Law, Alan S. Gutman and John Juenger for
Defendant and Respondent Michael Augustine.
Benedon & Serlin, Gerald M. Serlin and Judith E. Posner;
Niebow Law and Steven N. Niebow for Defendant and
Respondent Zachary Schneiderman.
_________________________
1
In March 2015, plaintiff Phillip Seretti, as the current
trustee of the Oflye Trust (Oflye) and on the trust’s behalf, sued
Zachary Schneiderman, a former trustee of Oflye, and Michael
Augustine, the current trustee of the Jojazak Irrevocable Trust
(Jojazak), asserting claims for breach of fiduciary duty, fraud,
conversion, and unjust enrichment based on a series of purported
loans made to Jojazak beginning in March 2007.1 Oflye was
a limited partner in three partnerships that made the loans
to Jojazak, but the partnerships declined to bring suit.
Oflye tried its claims to the court, which rendered a
judgment in favor of defendants under Code of Civil Procedure
section 631.8.2 The trial court concluded the applicable statute
of limitations barred Oflye’s claims and Oflye lacked standing
to bring a direct action for the recovery of partnership assets.
Oflye argues the evidence was insufficient to find its
claims were untimely. It also maintains it has standing to assert
a direct claim for breach of fiduciary duty against its former
trustee and, thus, standing to assert a related claim for unjust
enrichment to recover the partnerships’ funds from Jojazak.
And Oflye challenges a pretrial order sustaining defendants’
demurrers to its conversion cause of action. We find no error
in the trial court’s judgment. We affirm.
1 Zachary’s late father, Gerald Schneiderman, played a
significant role in the events that led to Oflye’s lawsuit. For
clarity we refer to Zachary and Gerald by their first names.
2 Statutory references are to the Code of Civil Procedure.
Section 631.8 authorizes the trial court, as trier of the facts in a
bench trial, to weigh the evidence and render a judgment for the
moving party after the other party has completed its presentation
of the evidence.
2
FACTS AND PROCEDURAL BACKGROUND
Consistent with our standard of review, we state the
facts established by the evidence in the light most favorable
to the judgment, indulging all presumptions and drawing all
reasonable inferences in its favor. (Tusher v. Gabrielsen (1998)
68 Cal.App.4th 131, 140 (Tusher); In re Marriage of Arceneaux
(1990) 51 Cal.3d 1130, 1133 (Marriage of Arceneaux).)3
1. The Complaint
On March 20, 2015, Seretti, on behalf of Oflye, filed this
action against Zachary and Augustine. The operative second
amended complaint asserts causes of action for breach of
fiduciary duty and fraud against Zachary, and unjust enrichment
against both defendants.4 The claims are premised on an alleged
3 Oflye did not object to the trial court’s statement of decision
or otherwise assert the statement failed to resolve a controverted
issue. (See §§ 632, 634.) We therefore are bound by the doctrine
of implied findings to presume the trial court made all factual
findings necessary to support the judgment, and the only issue,
as relates to the facts, is whether substantial evidence supports
those findings. (Tusher, supra, 68 Cal.App.4th at p. 140;
Marriage of Arceneaux, supra, 51 Cal.3d at pp. 1133–1134;
see also Shaw v. County of Santa Cruz (2008) 170 Cal.App.4th
229, 267.)
4 The second amended complaint also named Capital
Asset Management Associates, Inc. (CAMA), a former trustee
of Jojazak, and Pamela Mozer, a former trustee of Oflye and
director of CAMA, as defendants. Oflye dismissed Mozer
from the action before trial. CAMA, which apparently was
a suspended corporation, did not participate in the trial.
The trial court sustained demurrers to a claim for
conversion against both defendants and a claim for aiding
and abetting breach of fiduciary duty against Augustine.
3
conspiracy whereby Zachary breached his fiduciary duty to Oflye
and unjustly enriched Jojazak in connection with a real estate
development project known as “Imani Fe.”
According to the complaint, in September 2005, Seretti
met with his attorney, Pamela Mozer, and her husband, Gerald
Schneiderman, to discuss a possible investment in real property
Gerald was acquiring for a future development known as “White
Knoll.” After the meeting, Seretti decided to use sale proceeds
totaling approximately $1.4 million from a different real estate
transaction to invest in White Knoll through a tax-deferred
exchange.
As part of the proposed exchange, Mozer and Gerald
suggested Seretti set up an irrevocable trust to take title to
the White Knoll interest. In October 2005, the Oflye Trust was
settled, naming Seretti’s children as beneficiaries and Mozer
as trustee.
In early 2006, Oflye completed a tax-deferred exchange
to acquire the White Knoll property. As part of the transaction,
Oflye took an undivided 86.93 percent interest in the property
as a tenant in common with White Knoll Venture Ltd. (White
Knoll LP), which owned the remaining 13.07 percent interest.
Creative Environments of Hollywood, Inc. (CEH) served
as the general partner for White Knoll LP. Jojazak owned a
50 percent interest in CEH. CAMA (see fn. 4, ante), a company
controlled by Gerald and Mozer, served as Jojazak’s trustee.
Oflye also asserted a claim for accounting against all defendants,
but did not pursue the claim at trial. Oflye does not challenge
the dismissal of its aiding and abetting cause of action. We
discuss the conversion claim later in this opinion.
4
Zachary, Gerald’s son and Mozer’s stepson, was a beneficiary of
Jojazak.
In March 2006, Zachary became a co-trustee of Oflye with
Mozer. In September 2006, the tenants in common—Oflye and
White Knoll LP—obtained a $1 million loan secured by the White
Knoll property (the White Knoll Loan). Zachary signed the loan
documents on behalf of Oflye.
In November 2006, a company owned and controlled
by Gerald and Jojazak undertook the Imani Fe project. To
commence construction, the company needed to post a $1.75
million letter of credit or other similar security for a construction
bond. The complaint alleges Gerald and Jojazak lacked sufficient
capital to meet the obligation, and so they conspired with
Zachary and Mozer—Oflye’s co-trustees—to divert assets from
Oflye’s investments to finance Imani Fe.
In December 2007, Gerald allegedly convinced Seretti to
“diversify” Oflye’s initial investment in the White Knoll property
by converting its tenant in common interest into a limited
partner interest in White Knoll LP and then exchanging a
portion of that interest for limited partner interests in Spring-
Naud Associates, Ltd. (Spring LP) and 1800 Brand Associates,
Ltd. (Brand LP). As with White Knoll LP, CEH served as
the general partner for Spring LP and Brand LP.
The complaint alleges, from March to October 2007,
Zachary and Mozer “issued and/or caused to be issued” checks
from White Knoll LP to Jojazak totaling $950,000. In November
2007, Zachary and Mozer caused $1,050,491.03 to be transferred
from Spring LP to Jojazak. Zachary and Mozer likewise caused
Brand LP to transfer nearly $400,000 to Jojazak between October
2007 and July 2008. In 2009, Zachary and Mozer caused
5
Spring LP to transfer an additional $200,000 to Jojazak as part
of the alleged conspiracy to finance Imani Fe.
According to the complaint, the Imani Fe project was
completed in early 2010. At that time, the construction bond
was exonerated and returned to Jojazak.
In 2013, Augustine became the trustee for Jojazak. He
allegedly retained the borrowed funds and “knowingly refuse[d]
to return [them] to Oflye.”
The complaint alleges Seretti learned of the conspiracy
in August 2014, when he received information about the Jojazak
loans from the general partner for White Knoll LP, Spring LP,
and Brand LP.
2. The Trial
After a series of demurrers and amended pleadings, the
case proceeded to a bench trial against Zachary on the breach
of fiduciary duty and fraud causes of action and against
Augustine and Zachary on the unjust enrichment claim.
The evidence confirmed that, in March 2006, Oflye and
White Knoll LP acquired the White Knoll property as tenants
in common, with Oflye holding an 86.93 percent interest worth
approximately $1.4 million. In September 2006, the tenants in
common obtained a $1 million loan, secured by the White Knoll
property, to fund the property’s development. Zachary signed the
loan documents as Oflye’s co-trustee and personally guaranteed
the White Knoll Loan. In 2007, Seretti authorized Zachary to
“diversify” Oflye’s investment by converting its tenant in common
interest into limited partner interests in White Knoll LP,
Spring LP, and Brand LP. Each of the limited partnerships
was engaged in a different real estate development project in
Los Angeles county.
6
CEH was the general partner for the three limited
partnerships, as well as several other partnerships attached to
different development projects. Gerald and his business partner,
Manny Meza, ran CEH. Their respective family trusts—Jojazak
for Gerald and the AC Trust for Meza—each owned a 50 percent
share of the company. Zachary served as CEH’s secretary and
had authority to sign checks for the limited partnerships that
CEH managed. Zachary was also a beneficiary of Jojazak and
received distributions from the trust.
From 2006 to 2010, Seretti worked for CEH. He knew that
Zachary had a management position and that Zachary handled
financial matters for the company. While at CEH, Seretti sat
in on meetings with the development team to review current
projects, each project’s stage of development, and the pipeline for
new deals. During these meetings, Gerald often discussed CEH’s
plans for obtaining financing and raising equity for the different
projects it managed.
It was a common practice, as directed by Gerald and Meza,
for CEH to move money between its various development projects
by lending one partnership’s capital to Jojazak while having
another partnership borrow the same funds from the trust.
Gerald regularly talked about this practice and Zachary openly
argued with him about it in CEH’s office. Zachary worried the
practice jeopardized the solvency of the projects and he urged
Gerald to maintain sufficient reserves to ensure the partnerships’
financial integrity.
Seretti was aware of CEH’s practice of moving money
between its various partnerships by lending capital to Jojazak.
In April 2007, Seretti received an investor report and balance
sheet for White Knoll LP that listed a loan to Jojazak for
7
$600,000. A second investor report, dated September 2007,
showed the same $600,000 loan, while another report, in
November 2007, disclosed the loan had increased to $950,000.
Seretti likewise received investor reports for Spring LP and
Brand LP disclosing loans to Jojazak of $1,138,238.56 and
$335,000, respectively.
Seretti initially questioned Gerald and Zachary about
the loans in late 2007. During another meeting in June 2008,
Seretti confronted Gerald about the Jojazak loans and demanded
financial information about Oflye’s investments. Gerald told
Seretti that CEH used Jojazak to lend and borrow money for
the various projects and that the practice was beneficial to the
limited partners because Jojazak had substantial equity in the
partnerships and could pay a good interest rate on the borrowed
funds. Although Seretti did not receive all the information he
requested, he admitted he made no further inquiries about the
loans or the partnerships’ financial records after July 2008.
Around the same time in late 2007, CEH applied for a
$13 million construction bond to continue work on Imani Fe.
When the bond was denied, CEH negotiated a deal to deposit
cash into escrow to secure construction financing that would keep
the project moving forward. Concerns were raised internally
at CEH, including with Zachary, about money moving out of the
partnerships after CEH failed to secure the construction bond.
Seretti had heard about Imani Fe while working at CEH,
but he knew little about how it was progressing. He was aware of
the financial crisis and collapse of the real estate market in 2008,
and he had spoken with Gerald about CEH’s difficulty securing
construction financing during the recession. Seretti was also
openly concerned about the lack of progress on the development
8
projects in which Oflye had limited partnership interests.
By November 2010, he had seen CEH lay off half of its staff.
However, on his last day with CEH, December 31, 2010,
Seretti learned that an important milestone had been reached
on Imani Fe and that Gerald anticipated an influx of funds to
reinvigorate the company. At a New Year’s Eve celebration that
evening, Gerald told Seretti that, with the Imani Fe milestone
hit, they would “have the funds to get other projects back
on track.” Seretti testified he was “surprise[d]” by Gerald’s
comment, but he did not ask Gerald anything further about the
relationship between Imani Fe and CEH’s other development
projects.
Progress on the other projects apparently continued to stall
and, in January 2012, Seretti learned his investment in White
Knoll LP was at risk of being lost to a bank foreclosure. On
January 17, 2012, CEH emailed a progress report to the White
Knoll LP limited partners, including Seretti, reporting that due
to a lack of cooperation from the city, the economic downturn,
and the scarcity of construction financing, the partnership,
“after having covered the mortgage payments for years, [was]
finally unable to make these payments and the property fell
into foreclosure approximately three months ago.” The progress
report continued: “We have also explored the possibility of
selling the parcel in an effort to cut our losses, but have found
that the Property is of little value without a building [and] . . .
at this point, there has not been an acceptable prospect for the
purchase of the property.” On February 16, 2012, CEH sent
Seretti another letter reporting, “The White Knoll project
remains in foreclosure.”
9
Seretti testified he was “alarmed” by news of the
foreclosure and he contacted Mozer, who had become involved
in CEH’s operations following Gerald’s death in December 2011,
to find out what was happening with Oflye’s investments.
According to Seretti, Mozer told him she was “starting to find
out all about the properties and the developments and she was
starting to negotiate with banks to [obtain] refinancing.” Despite
the pending foreclosure and what Seretti already knew about
the Jojazak loans and Gerald’s practice of shifting funds between
the various limited partnerships, Seretti testified that he felt
comfortable with Mozer’s response and that “things were moving
forward.” He admitted he took no further action until June 2012,
when Mozer told him CEH was “having difficulty making [loan]
payments.” At that point Seretti followed up on his years-old
request for financial information about the White Knoll LP,
Brand LP, and Spring LP projects.
In fact, all three limited partnerships had multimillion
dollar loans that fell into default and foreclosure. By March
2014, the lender had sold the real property asset securing each
loan and had initiated deficiency actions against Jojazak (and
Zachary with respect to the White Knoll Loan) for breach of
written guaranties made for the benefit of White Knoll LP,
Brand LP, and Spring LP. In November 2014, Zachary and
Augustine, as trustee for Jojazak, agreed to pay the lender
$900,000 to settle the deficiency actions.
In December 2014, Meza called a meeting of the investors
in White Knoll LP, Brand LP, Spring LP, and the other limited
partnerships CEH managed. Seretti testified it was the
information presented at this meeting that first led him to
believe there had been an “embezzlement of funds” from
10
the limited partnerships in which Oflye had invested. Following
the meeting, Seretti revisited the financial records he had
received from CEH. Three months later, he filed this lawsuit.
According to Seretti’s damages expert, the loans CEH made
on behalf of White Knoll LP and Spring LP to Jojazak deprived
the partnerships of needed liquidity to service their debt
obligations, resulting in the foreclosures and loss of the
partnerships’ principal assets. As for the Brand LP loan to
Jojazak, however, Seretti’s expert admitted it had no effect on
the project’s failure or the partnership’s ultimate bankruptcy.
Seretti’s expert also acknowledged Oflye did not directly own
any of the funds that it claimed as damages, all of the money lent
to Jojazak had come from the limited partnerships, and Oflye
possessed only a fractional interest in those partnership assets.
3. The Judgment under Section 631.8
After Seretti’s presentation of evidence, Zachary and
Augustine filed motions for judgment under section 631.8. The
defendants argued the statute of limitations barred Oflye’s claims
because Seretti was aware of the Jojazak loans as early as 2007
and 2008, and no later than 2010. They also argued Oflye lacked
standing to assert its claims because the funds at issue were
partnership assets, and thus could be recovered through a direct
action by the limited partnerships or a derivative action on behalf
of the limited partnerships only.
After a hearing, the trial court granted the motions and
entered judgment for Zachary and Augustine. In its statement of
decision, the court found Oflye could not invoke the discovery rule
to delay accrual of its claims because the evidence showed Seretti
had received numerous investor reports disclosing the Jojazak
loans, he was actively involved in managing Oflye’s investments,
11
and his work at CEH made him aware of the circumstances
surrounding the loans by 2008 when he demanded detailed
financial information from the general partner. The court also
concluded Oflye lacked standing to bring a direct action against
the defendants because the alleged injury resulted from Jojazak’s
failure to return funds that belonged to the three limited
partnerships in which Oflye had a limited partner interest—
not funds that belonged to Oflye. Even with respect to the breach
of fiduciary duty claim against Zachary, the court reasoned Oflye
could not establish causation because the damages were suffered
by the limited partnerships, which had sole claim to the assets
at issue. Finally, the court concluded Seretti failed to prove that
Zachary committed fraud with respect to the Jojazak loans, or
that he had been unjustly enriched by the transfers to Jojazak.
The trial court entered judgment for defendants on all
causes of action. Seretti filed a timely notice of appeal.
DISCUSSION
1. Standard of Review
“After a party has completed his presentation of evidence in
a trial by the court, the other party, without waiving his right to
offer evidence in support of his defense or in rebuttal in the event
the motion is not granted, may move for a judgment. The court
as trier of the facts shall weigh the evidence and may render
a judgment in favor of the moving party . . . or may decline to
render any judgment until the close of all the evidence.” (§ 631.8,
subd. (a).)
“The purpose of Code of Civil Procedure section 631.8 is
‘to enable the court, when it finds at the completion of plaintiff’s
case that the evidence does not justify requiring the defense to
produce evidence, to weigh evidence and make findings of fact.’
12
[Citation.] Under the statute, a court acting as trier of fact may
enter judgment in favor of the defendant if the court concludes
that the plaintiff failed to sustain its burden of proof. [Citation.]
In making the ruling, the trial court assesses witness credibility
and resolves conflicts in the evidence. [Citations.] [¶] On appeal,
we view the evidence in the light most favorable to the judgment,
and are bound by trial courts’ findings that are supported by
substantial evidence. [Citation.] But, we are not bound by a
trial court’s interpretation of the law and independently review
the application of the law to undisputed facts.” (People ex rel.
Dept. of Motor Vehicles v. Cars 4 Causes (2006) 139 Cal.App.4th
1006, 1012.)
2. The Statute of Limitations Bars Oflye’s Claims
“A plaintiff must bring a claim within the limitations
period after accrual of the cause of action.” (Fox v. Ethicon
Endo-Surgery, Inc. (2005) 35 Cal.4th 797, 806 (Fox); § 312.)
“Generally speaking, a cause of action accrues at ‘the time
when the cause of action is complete with all of its elements.’
[Citations.] An important exception to the general rule of accrual
is the ‘discovery rule,’ which postpones accrual of a cause of
action until the plaintiff discovers, or has reason to discover,
the cause of action.” (Fox, at pp. 806–807.)
“The discovery rule protects those who are ignorant of their
cause of action through no fault of their own. It permits delayed
accrual until a plaintiff knew or should have known of the
wrongful conduct at issue.” (April Enterprises, Inc. v. KTTV
(1983) 147 Cal.App.3d 805, 832 (April Enterprises).) “A plaintiff
need not be aware of the specific ‘facts’ necessary to establish the
claim; that is a process contemplated by pretrial discovery. . . .
So long as a suspicion exists, it is clear that the plaintiff must
13
go find the facts; she cannot wait for the facts to find her.”
(Jolly v. Eli Lilly & Co. (1988) 44 Cal.3d 1103, 1111.)
We do not take a “hypertechnical approach” to the
discovery rule. (Fox, supra, 35 Cal.4th at p. 807.) “Rather than
examining whether the plaintiffs suspect facts supporting each
specific legal element of a particular cause of action, we look
to whether the plaintiffs have reason to at least suspect that
a type of wrongdoing has injured them.” (Ibid.)
“ ‘It is plaintiff’s burden to establish “facts showing that
he was not negligent in failing to make the discovery sooner
and that he had no actual or presumptive knowledge of facts
sufficient to put him on inquiry.” [Citation.] “[W]hether the
plaintiff exercised reasonable diligence is a question of fact
for the court or jury to decide.” ’ ” (April Enterprises, supra,
147 Cal.App.3d at p. 833; Hobart v. Hobart Estate Co. (1945) 26
Cal.2d 412, 437; see also Grisham v. Philip Morris U.S.A., Inc.
(2007) 40 Cal.4th 623, 638 [“California law recognizes a general,
rebuttable presumption, that plaintiffs have ‘knowledge of the
wrongful cause of an injury.’ ”].)
A three-year statute of limitations applies to a cause of
action for fraud, as well as claims for breach of fiduciary duty
and unjust enrichment based on fraud. (§ 338, subd. (d); Federal
Deposit Ins. Corp. v. Dintino (2008) 167 Cal.App.4th 333, 338
[three-year statute of limitations applies to unjust enrichment
based on fraud or mistake]; Fuller v. First Franklin Financial
Corp. (2013) 216 Cal.App.4th 955, 963 [“limitations period is
three years . . . for a cause of action for breach of fiduciary duty
where the gravamen of the claim is deceit”]; cf. City of Vista v.
Robert Thomas Securities, Inc. (2000) 84 Cal.App.4th 882, 889
[four-year statute of limitations applies to breach of fiduciary
14
duty, unless the gravamen of the claim is actual or constructive
fraud, in which case the statute of limitations is three years].)
The evidence proved Seretti knew about the alleged
wrongful fund transfers to Jojazak, and about CEH’s practice
of using Jojazak to shift capital between the various limited
partnerships, as early as 2007 or 2008. From April 2007 to
January 2008, Seretti admitted he received and reviewed
investor reports and balance sheets showing a $950,000 loan to
Jojazak from White Knoll LP, a $1,138,238.56 loan to Jojazak
from Spring LP, and a $335,000 loan to Jojazak from Brand LP.5
Thus, by 2008, Seretti knew CEH had transferred capital to
Jojazak far in excess of Oflye’s $1.4 million investment in those
limited partnerships.
During this period, Seretti also worked for CEH, where
the practice of using Jojazak to move money between the limited
partnerships was openly discussed. By June 2008, Seretti had
twice confronted Gerald about the Jojazak loans, and Gerald
had told Seretti CEH was indeed using Jojazak to move money
between its development projects, including the limited
partnership projects in which Oflye had an interest. But despite
demanding financial information that was not fully provided,
Seretti admitted he took no further action to ensure Oflye’s
investments remained solvent, even while, in the midst of
the recession, Gerald told him CEH was having difficulty
securing capital for its projects and while he witnessed the
company lay off half its workforce. Based on these compounding
5 From February 2008 to November 2010, Seretti received
additional investor reports with balance sheets for each of
the limited partnerships reflecting ongoing loans to Jojazak
in different and fluctuating amounts.
15
business irregularities, coupled with CEH’s tenuous financial
condition and the stalled progress of its projects, the trial court
reasonably concluded Seretti knew or should have known that
capital from the limited partnerships may have been illicitly
diverted and that Oflye’s investments were in jeopardy. (See,
e.g., Vertex Inv. Co. v. Schwabacher (1943) 57 Cal.App.2d 406,
415–416 [evidence established stockholders’ lack of diligence
in failing to discover comingling of company funds where
defendant’s conduct was “such a departure from common
business practice” that it should have prompted investigation;
observing, “[i]f a request for a statement or audit had been made,
a failure on the part of [defendant] to comply would arouse a
strong suspicion of irregularity”].)
Critically, in 2010, Seretti also learned of Imani Fe’s
apparent connection to the Jojazak loans. At the heart of Oflye’s
operative complaint is an alleged conspiracy between Zachary,
Gerald, and Jojazak to finance Imani Fe through the fraudulent
embezzlement of funds from Oflye’s investments, which
ultimately led to the insolvency of White Knoll LP, Brand LP,
and Spring LP. The evidence showed Gerald essentially disclosed
this purported scheme to Seretti at the end of 2010, when he told
Seretti the completion of a milestone for Imani Fe meant money
would be freed up to “get other projects back on track.” Seretti
testified the implication of Gerald’s statement “surprise[d]” him.
But, despite having concerns about Oflye’s investments, Seretti
admitted he made no further inquiry about the connection
between those development projects and Imani Fe. In view
of everything Seretti knew by 2008, and certainly by the end
of 2010, the trial court reasonably concluded Seretti had “reason
16
to at least suspect that a type of wrongdoing ha[d] injured”
Oflye’s investments. (Fox, supra, 35 Cal.4th at p. 807.)
On appeal, Seretti contends his knowledge of the Jojazak
loans was insufficient to trigger the accrual of Oflye’s claims
because he “had no notice that they were not paid until December
2014.” The contention overlooks everything else Seretti knew
about the circumstances of the loans, the progress of the relevant
development projects, and the financial condition of the limited
partnerships. Most significantly, it overlooks Oflye’s own
theories of causation and damages in this action. According
to the testimony of Oflye’s damages expert, Oflye was injured
when, as a result of the transfers to Jojazak, the relevant limited
partnerships were unable to service their debts and lost their
principal assets to foreclosure. As discussed, the evidence proved
Seretti was aware of this risk at least by 2010, when Gerald told
him about CEH’s difficulty securing capital for its projects. But
there was more. As the trial court emphasized in its statement of
decision, by January 2012, Seretti had received a progress report
explicitly informing him that White Knoll LP was unable to make
its mortgage payments and that “the property fell into foreclosure
approximately three months ago.” The report advised Seretti
that the partnership had “explored the possibility of selling the
parcel . . . to cut our losses, but [we] have found that the Property
is of little value without a building thereon.” (Italics added.) The
evidence supports the trial court’s finding that Seretti knew of
Oflye’s purported injury, and that the allegedly wrongful loans
to Jojazak might be its cause, more than three years before this
action was filed in March 2015. (See Davies v. Krasna (1975) 14
Cal.3d 502, 514 [“the infliction of appreciable and actual harm,
17
however uncertain in amount, will commence the statutory
period”].)
Finally, Seretti argues Zachary’s status as Oflye’s trustee
excused any failure to investigate and thus delayed accrual until
Seretti “actually discovered the facts” constituting Oflye’s causes
of action. (See Hobbs v. Bateman Eichler, Hill Richards, Inc.
(1985) 164 Cal.App.3d 174, 202 [“Where there is a fiduciary
relationship, the usual duty of diligence to discover facts does
not exist” and “the limitations period does not begin to run until
[the plaintiff] actually discovers the facts constituting the cause
of action.”].) The contention again overlooks all that Seretti
actually knew. As discussed, the evidence established Seretti
had actual knowledge of the fund transfers to Jojazak; CEH’s
practice of using Jojazak to move funds between its various
limited partnerships; Gerald’s use of this practice to finance work
on Imani Fe; the solvency risk the relevant limited partnerships
faced; and, ultimately, the foreclosure actions that, according
to Oflye’s theory, resulted in the loss that Oflye claimed as
damages. The evidence supports the trial court’s conclusion
that the statute of limitations bars Oflye’s claims.
3. Oflye Lacked Standing to Pursue a Direct Action
for the Recovery of Partnership Assets
Oflye’s failure to bring its claims within the prescribed
limitations period is alone sufficient to affirm the judgment on
the claims adjudicated in the trial. Nevertheless, we will briefly
address the standing issue because it too provides a categorical
basis, independent of the statute of limitations, to affirm the
judgment.
Under California law, “every action must be prosecuted
in the name of the real party in interest.” (Wallner v. Parry
18
Professional Bldg., Ltd. (1994) 22 Cal.App.4th 1446, 1449
(Wallner), citing § 367.) Because the partnership entity is the
owner of partnership property, the real party in interest on
claims for damage to partnership property is the partnership—
not the individual partners. (Weil & Brown, Cal. Practice Guide:
Civil Procedure Before Trial (The Rutter Group 2020) ¶ 2:15.5;
Wallner, at p. 1449; see also Corp. Code, § 15901.04, subd. (a)
[“A limited partnership is an entity distinct from its partners.”];
id., § 16501 [“A partner is not a coowner of partnership property
and has no interest in partnership property that can be
transferred, either voluntarily or involuntarily.”].) “Individual
partners may not sue for damage to the partnership property
or to their individual ‘beneficial interest’ in the property.”
(Weil & Brown, ¶ 2:15.5; Mayer v. C.W. Driver (2002) 98
Cal.App.4th 48, 60 (Mayer).)
When the gravamen of the complaint is injury to the
limited partnership, or where the action seeks to recover assets
of the partnership, an individual partner must bring a “derivative
action,” naming the partnership as a defendant, for the benefit
of the limited partnership. (Wallner, supra, 22 Cal.App.4th
at p. 1449; see Grosset v. Wenaas (2008) 42 Cal.4th 1100, 1108;
Schuster v. Gardner (2005) 127 Cal.App.4th 305, 312 [“ ‘[A]
shareholder cannot bring a direct action for damages . . . on
the theory their alleged wrongdoing decreased the value of his
or her stock (e.g., by reducing corporate assets and net worth).
The corporation itself must bring such an action, or a derivative
suit may be brought on the corporation’s behalf.’ ”].) A “cause
of action is individual, not derivative, only ‘ “where it appears
that the injury resulted from the violation of some special duty
owed the stockholder by the wrongdoer and having its origin
19
in circumstances independent of the plaintiff’s status as a
shareholder.” ’ ” (Nelson v. Anderson (1999) 72 Cal.App.4th 111,
124, italics added.)
As Oflye’s damages expert confirmed, it is undisputed
that Oflye had no direct ownership interest in any of the assets
it claimed as damages, all of the money transferred to Jojazak
had come from the limited partnerships, and Oflye possessed
only a fractional interest in the partnerships. Based on these
admissions and undisputed evidence, the trial court correctly
concluded that “[a]ny purported claim to the moneys the Jojazak
Trust allegedly received from the limited partnerships belongs
solely to those limited partnerships” and Oflye has “no standing”
to bring a direct action for recovery of those partnership assets.
PacLink Communications Internat., Inc. v. Superior Court
(2001) 90 Cal.App.4th 958 (PacLink) is instructive. In PacLink,
members of a limited liability company (LLC) filed suit against
several business entities and individuals alleging the LLC’s
assets were transferred without the plaintiff’s knowledge or
consent and without paying any consideration to the plaintiffs.
(Id. at p. 961.) The plaintiffs alleged “ [‘t]he fraudulent transfers
and the conversion of the “sale” proceeds rendered [the LLC]
insolvent and thereby defrauded plaintiffs by preventing them
from being paid for their Ownership Interests in [the LLC].’ ”
(Id. at pp. 961–962, italics omitted.) The defendants demurred to
claims for fraudulent transfer, conspiracy to commit conversion,
and imposition of a constructive trust, arguing the plaintiffs
lacked standing because they could “not claim any direct injury
or loss suffered by them,” since the gravamen of the claims was
that the LLC’s assets had been diminished. (Id. at p. 962.) The
trial court overruled the demurrer, concluding the plaintiffs were
20
“ ‘attempting to recover [for] their personal injury, as [opposed] to
injury to the LLC.’ ” (Id. at p. 963.) The reviewing court issued
a writ directing the trial court to sustain the demurrer without
leave to amend. (Id. at p. 966.)
The PacLink court explained: “[T]he essence of plaintiffs’
claim is that the assets of [the LLC] were fraudulently
transferred without any compensation being paid to the LLC.
This constitutes an injury to the company itself. Because
members of the LLC hold no direct ownership interest in the
company’s assets [citation], the members cannot be directly
injured when the company is improperly deprived of those assets.
The injury was essentially a diminution in the value of their
membership interest in the LLC occasioned by the loss of the
company’s assets. Consequently, any injury to plaintiffs was
incidental to the injury suffered by [the LLC].” (PacLink, supra,
90 Cal.App.4th at p. 964, fn. omitted, italics added.) Because the
“ ‘gravamen of the complaint’ ” was “ ‘injury to the whole body
of [the LLC’s members],’ ” the PacLink court concluded “ ‘it was
for the [LLC] to institute and maintain a remedial action.’ ” (Id.
at p. 966.) If the responsible officials refused or failed to act,
the plaintiffs’ only recourse was a “derivative action” to restore
the assets to the LLC. (Ibid.)
Like the claims in PacLink, the essence of Oflye’s lawsuit
is that assets of the limited partnerships in which Oflye held an
interest were improperly “loaned” to Jojazak and never repaid.
According to Oflye’s damages expert, Oflye was damaged when,
as result of the fraudulent loans, the partnerships were unable to
service their debts and lost their principal assets to foreclosure,
rendering Oflye’s partnership interest worthless and its capital
contribution lost. This was an injury to the whole body of the
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limited partnership—not one exclusively borne by Oflye. Indeed,
like Oflye, every limited partner suffered the same injury—loss
of their capital contribution—due to the partnerships’ insolvency.
And, like every limited partner, any injury to Oflye was
necessarily “incidental” to the injuries suffered by the limited
partnerships in which Oflye maintained an interest. (PacLink,
supra, 90 Cal.App.4th at p. 964.)
On appeal, Seretti argues “Oflye is a trust and is seeking
relief for the breaches of fiduciary duty by its trustee . . . and
against . . . the successor trustee of Jojazak, which received the
fruits of those breaches and which he continues to hold on to on
its behalf.” He contends these claims “uniquely” belong to Oflye
and not to the limited partnerships, “which have no claim for
the Oflye trustee[’s] breaches of duty and Jojazak’s participation
therein.”
Seretti’s argument ignores that Oflye suffered no injury
from Zachary’s alleged breach of fiduciary duty because Oflye had
no direct ownership interest in the partnership assets that were
transferred to Jojazak. (See PacLink, supra, 90 Cal.App.4th at
p. 964 [“Because members of the LLC hold no direct ownership
interest in the company’s assets [citation], the members cannot
be directly injured when the company is improperly deprived of
those assets.”].) Regardless of whether Zachary’s participation
in the Jojazak loans constituted a breach of fiduciary duty, the
undisputed evidence established Oflye did not loan money to
Jojazak and Jojazak had no obligation to repay the loans to Oflye.
Thus, while the limited partnerships may have no claim against
Zachary for the breach of a fiduciary duty owed to Oflye, it is
also the case that Oflye can make no claim for the recovery of
partnership assets by recasting the partnerships’ claims for
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unpaid loans as an individual claim for breach of fiduciary duty.
(See Mayer, supra, 98 Cal.App.4th at p. 60 [limited partners
“could not have sued individually for damage to their individual
‘beneficial interest’ in partnership property”].)
Oflye suffered no direct injury from the allegedly improper
loans. Its injury, like that of every other limited partner, was
“occasioned by the loss of the [partnerships’] assets” and was
necessarily “incidental” to the injuries the partnerships suffered.
(PacLink, supra, 90 Cal.App.4th at p. 964.) The trial court
correctly determined Oflye does not have standing to bring
a direct action for damage to the partnerships. (Cf. Sutter v.
General Petroleum Corp. (1946) 28 Cal.2d 525, 530–532 [plaintiff
could assert direct action for fraud that induced him “to form and
invest in a corporation” because his individual “injury resulted
from the formation of [the] corporation and investments therein
to carry on a project that could not be conducted because of
the fraud,” and that injury was distinct from the injury the
corporation suffered from the diminished value of its assets].)
4. Oflye Cannot State a Claim for Conversion of
the Limited Partnerships’ Assets
Before trial, the court sustained Zachary’s and Augustine’s
demurrers to Oflye’s conversion cause of action without leave to
amend. The ruling was correct.
“Conversion is the wrongful exercise of dominion over
the property of another. The elements of a conversion claim are:
(1) the plaintiff’s ownership or right to possession of the property;
(2) the defendant’s conversion by a wrongful act or disposition of
property rights; and (3) damages.” (Burlesci v. Petersen (1998)
68 Cal.App.4th 1062, 1066; Hodges v. County of Placer (2019)
41 Cal.App.5th 537, 551–552; see also Voris v. Lampert (2019)
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7 Cal.5th 1141, 1150.) To state a claim for conversion, the
plaintiff must allege facts sufficient to prove he was “entitled to
immediate possession [of the property] at the time of conversion.”
(Hartford Financial Corp. v. Burns (1979) 96 Cal.App.3d 591, 598
(Hartford Financial), italics omitted.)
In support of Oflye’s conversion claim, the operative
complaint alleges Zachary and Mozer, “without any authorization
to do so and in breach of their fiduciary duties to Oflye,
transferred the funds invested in [White Knoll LP], Spring [LP],
and Brand [LP] by Oflye in the amount of $1,405,617.12 directly
to Jojazak.” The complaint alleges “Jojazak has never had any
right to the funds” it received.
Oflye’s conversion claim fails for the same reason it lacked
standing to assert its other claims—namely, the complaint’s
allegations admit (and the evidence at trial proved) the allegedly
converted assets belonged to the limited partnerships and Oflye
was not entitled to immediate possession of those assets at the
time of the alleged conversion. (See Hartford Financial, supra,
96 Cal.App.3d at p. 598.)
On appeal, Seretti suggests this straightforward analysis
fails to appreciate the “more subtle and complex” conception
of property under the current doctrine of conversion. Citing
Welco Electronics, Inc. v. Mora (2014) 223 Cal.App.4th 202(Welco), he maintains the conversion here was “effected”
by diverting “monies and/or property . . . from the limited
partnerships into which Oflye’s [property] had been ‘diversified,’ ”
and this, although not constituting the “physical conversion
of anything,” was akin to the defendant’s use of the plaintiff’s
credit card in Welco to convert money into the defendant’s
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bank account. (See Welco, at p. 211.) The argument
misunderstands the problem with Oflye’s conversion claim.
The problem with Oflye’s claim is not that the property at
issue is intangible. Rather, the problem is, unlike the plaintiff in
Welco, Oflye had no immediate right to possession of the property
because the property belonged to the limited partnerships—not
to Oflye. (Cf. Welco, supra, 223 Cal.App.4th at p. 211 [approving
conversion claim where the defendant “wrongfully caused a
charge to plaintiff’s credit card account by having a specific
sum of money paid through defendant’s credit card terminal
into defendant’s bank account” (italics added)]; see Corp. Code,
§ 16501 [“A partner is not a coowner of partnership property and
has no interest in partnership property that can be transferred,
either voluntarily or involuntarily.”]; see also id, § 16502 [“The
only transferable interest of a partner in the partnership is the
partner’s share of the profits and losses of the partnership and
the partner’s right to receive distributions.”].) Because Oflye did
not own the property that was allegedly converted, the trial court
correctly sustained defendants’ demurrers to the conversion claim
without leave to amend.
25
DISPOSITION
The judgment is affirmed. Defendants Zachary
Schneiderman and Michael Augustine are entitled to their costs.
NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS
EGERTON, J.
We concur:
EDMON, P. J.
LAVIN, J.
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