Central Hotel Trust 90021 v. Just In Time Enterprises CA2/8

Filed 5/21/15 Central Hotel Trust 90021 v. Just In Time Enterprises CA2/8
NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS
California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for
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IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
SECOND APPELLATE DISTRICT
DIVISION EIGHT
CENTRAL HOTEL TRUST 90021, B251879
Plaintiff and Appellant, (Los Angeles County
Super. Ct. No. BC475285)
v.
JUST IN TIME ENTERPRISES, LLC, et
al.,
Defendants and Respondents.
APPEAL from the judgment of the Superior Court of Los Angeles County.
Barbara Scheper, Judge. Reversed in part and affirmed in part.
Law Offices of Michael Carter Smith and Michael C. Smith for Plaintiff and
Appellant.
GP Law Group and Manee Pazargad for Defendants and Respondents.
**********
This is an appeal from the sustaining of a demurrer without leave to amend.
Plaintiff Central Hotel Trust 90021 sued defendants Just in Time Enterprises, LLC and its
CEO Justin Hall. The operative second amended complaint alleged causes of action for
breach of fiduciary duty, declaratory relief, fraud, and constructive fraud as to defendant
Hall in his individual capacity. The trial court sustained defendant Hall’s demurrer
without leave to amend, reasoning the complaint did not state any basis for individual
liability. Finding that the contract between plaintiff and the limited liability company
(LLC) defendant belies any claim of a joint venture partnership with Hall as an
individual, we affirm the judgment as to the breach of fiduciary duty and constructive
fraud causes of action. However, we find the claim for fraud is adequately pled, and
therefore reverse as to that cause of action only.
BACKGROUND
On December 14, 2011, plaintiff sued defendants for breach of a joint venture
agreement, breach of fiduciary duty, quiet title, declaratory relief, resulting or
constructive trust, fraud and deceit, and constructive fraud. Plaintiff entered an
agreement with defendant Just In Time for the purpose of purchasing properties at a Los
Angeles County public tax auction on October 17 and 18, 2011. The agreement was
signed on behalf of plaintiff by its general manager, Sean Kojoori, and on behalf of Just
in Time by its CEO, defendant Hall.1 All of the causes of action were stated against both
of the defendants, including the contract claim, even though the agreement was signed by
defendant Just in Time, and not defendant Hall in his individual capacity.
The agreement contemplated that the properties would be developed and sold
within one year. Under the agreement, plaintiff was to invest $50,000 in Just in Time in
exchange for a 50 percent interest in the properties purchased at the tax sale. Defendant
Hall represented that the other half of the purchase funds would be provided by additional
1 We grant plaintiff’s request that we take judicial notice of the Statement of
Information filed with the Secretary of State for Just in Time, demonstrating Hall’s
authority to act on behalf of the LLC.
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investors. However, only $20,000 was contributed by other investors, and at Hall’s
request, plaintiff invested another $10,000. The parties’ written contract was not
modified or amended to reflect this additional investment. Based on the pro rata
contributions by all of the investors, plaintiff believed its interest in the tax sale properties
to be 75 percent, although Hall refused to amend the contract to reflect this interest.
Defendant Hall purchased 10 properties at the tax sale. Consistent with the
parties’ agreement, title to the properties was held by defendant Just in Time. At the
same auction, plaintiff’s general manager also purchased some properties. On
October 25, 2011, after the properties had been paid for, plaintiff’s general manager met
with Hall to inspect the properties. Defendant Hall would not allow the inspections to
proceed, falsely claiming that plaintiff owed Hall a $150,000 consulting fee, representing
15 percent of the “purely speculative” profit to be made on the properties purchased at
the tax sale. Hall demanded payment of the “fictitious” consulting fee, or that plaintiff
relinquish its interest in the parties’ joint venture properties. Plaintiff alleged Hall had
never been retained as a consultant.
The parties’ contract was appended to the complaint. It was captioned
“Investment Receipt and Summary.” The agreement recited that Just In Time was
formed to purchase properties at the October 17 and 18, 2011 tax auction, and that its
primary objective was to purchase and develop properties, with the goal of selling them
within one year for a profit. The agreement acknowledged that “Just in Time . . . has
received an investment of $50,000 from [plaintiff].” As a consequence, plaintiff acquired
“50% equity ownership in all real properties purchased” at the tax auction by defendant
Just in Time. Defendant Just in Time would recover its administrative and development
expenses after the sale of the properties. The agreement provided, “[t]here are no
guarantees expressed or implied within this agreement or the real estate market as a
whole. All projections and objectives are based exclusively on current market trends and
the studied successes, past and present by the Company’s CEO Justin Hall. Both parties
agree that all investments are a risk.” The agreement further provided that “[a]ny
agreement changes must be written as a separate amendment and signed by both parties.”
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On July 12, 2012, plaintiff filed a first amended complaint which was nearly
identical to the original complaint,2 but newly included alter ego and aiding and abetting
allegations.
Defendant Hall demurred to the first amended complaint, arguing that it stated no
personal basis for liability, reasoning he was not a signatory to the contract, and any
fraudulent misrepresentations were made on behalf of the LLC, and not in his individual
capacity. The trial court sustained the demurrer with leave to amend.
The second amended complaint alleged causes of action for breach of the joint
venture agreement, breach of fiduciary duty, quiet title, declaratory relief, resulting or
constructive trust, two claims for fraud and deceit (one against the LLC and the other
against Hall), two claims for constructive fraud (one against the LLC and the other
against Hall), and cancellation of instruments.3 The amended pleading eliminated the
alter ego allegations, and eliminated Hall as a defendant for many of the claims, including
the contract claim, the quiet title claim, the constructive trust claim, and the claim for
cancellation of instruments. Otherwise, the factual allegations were nearly identical to
the earlier pleadings.
The claim for breach of fiduciary duty alleged that “[b]y intentionally repudiating
the existence of the joint venture and denying Plaintiff’s interest in the Joint Venture
Properties, Defendant Hall materially breached the duty of care owed to Plaintiff.” The
claim also incorporated allegations that “[a] close and confidential relationship existed
between the General Manager and defendant Hall and the General Manager reposed the
utmost trust and confidence in Hall who represented that he had participated in six (6)
2 The amended pleading was apparently filed in response to a demurrer filed by
defendant Hall, before the hearing on the demurrer. The demurrer to the original
complaint is not part of the record on appeal.
3 The claim for cancellation of instruments was brought against individuals to
whom some of the subject properties were transferred during the pendency of this case.
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previous tax auctions and claimed to have a high level of knowledge and expertise in tax
auctions.”
The claim for declaratory relief alleged that a controversy existed between
plaintiff and Hall “in that defendant Hall claims that Plaintiff owes defendant Hall,
personally, a consultation fee of $150,000 (‘consultation fee’) with respect to the
Separate Properties purchased independently by the General Manager at the auction.
Plaintiff contends that Hall is not owed any sum of money whatsoever in connection with
the purchase of the Separate Properties. [¶] . . . [¶] . . . Plaintiff desires a judicial
determination of the respective rights of the parties in order that the parties may ascertain
their rights and duties with respect to the Joint Venture Properties and the purported
consultation fee.”
The fraud cause of action alleged that “[b]y entering into the joint venture
agreement. . . . Defendant Hall promised the General Manager that the [plaintiff] and
Just in Time would share equally in the ownership of the joint venture assets and in the
profits and losses of the joint venture.” The second amended complaint further alleged
that Hall had no intention of performing on the promises made to plaintiff, and made the
promises to induce plaintiff “to invest $60,000 in Just in Time” from which Hall would
gain profits and benefits for himself. It also alleged a “close and confidential
relationship” between plaintiff’s general manager, and that the general manager “reposed
the utmost confidence and trust in Hall.” This cause of action incorporated the earlier
allegations that Hall had wrongfully claimed entitlement to a consulting fee.
The cause of action for constructive fraud alleged that “[b]y virtue of the joint
venture agreement, the relationship between Plaintiff and Defendant Hall was fiduciary in
nature. Defendant Hall thereby owed Plaintiff the fiduciary duties of loyalty and care,
and the obligation to conduct the joint venture business with good faith and fair dealing.
Because Plaintiff’s confidence in Defendant Hall’s integrity caused Plaintiff to entrust
Defendant with the authority to act for the joint venture and to invest $60,000 in the joint
venture, a confidential relationship existed at all times herein mentioned between Plaintiff
and Defendant. [¶] . . . [¶] . . . Defendant Hall breached his fiduciary duties to Plaintiff
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and violated the relationship of trust and confidence by concocting a secret scheme to
exclude Plaintiff from its interest in the joint venture properties, by demanding that
Plaintiff relinquish its interest in the joint venture properties.” The cause of action also
incorporated allegations that a “close and confidential relationship” existed between Hall
and plaintiff’s general manager based on Hall’s experience participating in tax sales.
The second amended complaint also newly alleged that defendant Just in Time,
through defendant Hall, had sold seven of the subject properties on Craigslist or Ebay,
notwithstanding the lis pendens filed by plaintiff. Appended to the pleading were grant
deeds whereby Just in Time transferred the properties to other individuals. The deeds
were signed by Hall in his capacity as CEO. The transfers occurred during the pendency
of this action, in 2012.
Defendant Hall again demurred, arguing he was not a party to the contract, and
therefore there was no basis for individual liability arising out of the contractual
relationship. Defendant additionally argued that the fraud claims failed because Hall was
acting on behalf of Just in Time, and because the claims were not alleged with sufficient
specificity.
In opposition, plaintiff urged that joint venturers owe fiduciary duties, and that
Hall personally induced plaintiff’s investment, and should not be permitted to hide
behind the “veil” of the LLC defendant.
The trial court sustained the demurrer without leave to amend. The trial court
found the allegations against Hall “deficient” and there was “no . . . legal basis to assert
liability against defendant Hall.” Plaintiff timely appealed the order of dismissal.
DISCUSSION
A demurrer tests the legal sufficiency of the complaint. We review the complaint
de novo to determine whether it alleges facts sufficient to state a cause of action. 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. We also consider matters that may
be judicially noticed. (Blank v. Kirwan (1985) 39 Cal.3d 311, 318.) When a demurrer is
sustained without leave to amend, “we decide whether there is a reasonable possibility
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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.”
(Blank, supra, at p. 318.) “The plaintiff bears the burden of proving there is a reasonable
possibility of amendment. . . . [¶] To satisfy that burden on appeal, a plaintiff ‘must
show in what manner he can amend his complaint and how that amendment will change
the legal effect of his pleading.’ . . . The plaintiff must clearly and specifically set forth
the ‘applicable substantive law’ and the legal basis for amendment, i.e., the elements of
the cause of action and authority for it.” (Rakestraw v. California Physicians’ Service
(2000) 81 Cal.App.4th 39, 43-44, citations omitted.)
The second amended complaint alleged causes of action for breach of fiduciary
duty, declaratory relief, fraud, and constructive fraud against defendant Hall. In resolving
this appeal, it is important to note what is not at issue. Plaintiff’s appellate brief offers no
additional facts it might allege, and does not seek leave to amend to add alter ego
allegations against defendant Hall. Plaintiff also does not seek to revive its declaratory
relief cause of action. This appeal only concerns the sufficiency of plaintiff’s claims for
breach of fiduciary duty, fraud, and constructive fraud against Hall in his individual
capacity. Of these claims, we conclude that only the fraud claim is well stated.
The breach of fiduciary duty and constructive fraud causes of action allege the
existence of a fiduciary relationship based on the joint venture agreement. It is well
settled that joint venturers owe fiduciary duties to each other. (Weiner v. Fleischman
(1991) 54 Cal.3d 476, 482.) It is also well settled that constructive fraud claims apply
only when a fiduciary or confidential relationship exists. (Assilzadeh v. Cal. Fed. Bank
(2000) 82 Cal.App.4th 399, 415.) These claims fail for the simple reason that the second
amended complaint and appended contract make clear that the only parties to the joint
venture agreement were plaintiff and Just in Time, and therefore a fiduciary relationship
arose only between the contracting business entities.
These causes of action also incorporated allegations that plaintiff’s general
manager reposed confidence and trust in Hall. A confidential relationship, giving rise to
fiduciary duties, may exist between two persons when one has gained the confidence of
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the other and purports to act or advise with the other’s interest in mind. Such a
relationship may exist even when there is no fiduciary relationship, as long as one party
has reposed trust and confidence in the other, who is aware of this fact. (Driscoll v. Los
Angeles (1967) 67 Cal.2d 297, 308, fn. 11.)
The allegations concerning a “close and confidential relationship” between Hall
and plaintiff’s general manager are insufficient to give rise to a fiduciary duty. The
second amended complaint alleges that two business entities entered into a contract for
the purpose of purchasing and developing real properties. The complaint repudiates the
existence of any consulting relationship between plaintiff and Hall. The complaint did
not allege that Hall provided any investment advice to plaintiff. Instead, the contract
between the parties made clear that plaintiff was advised that real estate investments are
uncertain, and that no results were guaranteed. These allegations, taken as a whole,
simply do not suggest that Hall gained an advantage over plaintiff by virtue of any
special relationship that existed between Hall and plaintiff’s general manager.
The trial court erred, however, in sustaining the demurrer to the fraud cause of
action. The second amended complaint alleged that Hall represented, on behalf of Just in
Time, that Just in Time would share an equity interest in the properties purchased at the
tax sale with plaintiff. However, Hall made this representation knowing of its falsity,
given his intent to assert a bogus claim for a consulting fee, to induce plaintiff to enter
into the agreement and invest funds in Just in Time. (See Charnay v. Cobert (2006)
145 Cal. App. 4th 170, 184 [reciting elements of fraud cause of action].)
Relying on former Corporations Code sections 17101 and 17158, defendant Hall
argues he may not be held individually liable for the torts of the defendant LLC, as he
was not a signatory to the contract, and was merely acting on the LLC’s behalf. (See
Stats. 1999, ch. 490, § 3, Stats. 1996, ch. 57, § 14.) These statutes provide that members
and officers of an LLC are not personally liable for liabilities of the LLC “solely by
reason of being a [member or officer] of the limited liability company.” (Ibid.)
However, former section 17101, subdivision (c) expressly provides for individual liability
“for the member’s participation in tortious conduct.” (Stats. 1999, ch. 490, § 3 .)
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In People v. Pacific Landmark LLC (2005) 129 Cal.App.4th 1203, 1213, the court
analyzed these statutes, and concluded that while “managers of limited liability
companies may not be held liable for the wrongful conduct of the
companies merely because of the managers’ status, they may nonetheless be held
accountable under Corporations Code section 17158, subdivision (a) for their personal
participation in tortious or criminal conduct, even when performing their duties as
manager.” In that case, the City of Los Angeles sought an injunction against an illegal
massage parlor, the LLC lessor of the property on which the parlor was operated, and
against the lessor’s manager. The manager claimed he was exempt from any personal
liability. Finding the city did not seek to impose the injunction on him simply because of
his status as manager, but because of his personal participation (he signed the lease,
retained the right to inspect the premises, served the notice to quit yet failed to inspect to
determine compliance, failed to remove the sign advertising the massage parlor, etc.), the
court concluded “managers . . . may be personally liable for their participation in [the]
wrongs” of the LLC. (Id. at pp. 1216-1217.)
Such is the case here. The second amended complaint does not seek to impose
liability against Hall merely because of his status as CEO, but because of his personal
role in the alleged wrongdoing.
DISPOSITION
The judgment is reversed in part and affirmed in part. Plaintiff and appellant shall
recover its costs on appeal.
GRIMES, J.
WE CONCUR:
RUBIN, Acting P. J.
FLIER, J
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