Judge: Barbara M. Scheper, Case: 22SMCV00314, Date: 2022-12-19 Tentative Ruling
Case Number: 22SMCV00314 Hearing Date: December 19, 2022 Dept: 30
Dept. 30
Calendar No.
Frankel vs. Holiday Villa East,
et. al., Case No. 22SMCV00314
Tentative Ruling re: Cross-Defendant’s Demurrer to First Amended
Cross-Complaint; Motion to Strike
Cross-Defendant David Frankel (Frankel) demurs to the First Amended
Cross-Complaint of Holiday Villa East and Diller Floor Covering, Inc.
(collectively, Cross-Complainants). The demurrer is sustained as to the second
and third causes of action with ten (10) days leave to amend, and overruled as
to the first, fourth, fifth, and sixth causes of action. The motion to strike
is denied.
In reviewing the legal sufficiency
of a complaint against a demurrer, a court will treat the demurrer as admitting
all material facts properly pleaded, but not contentions, deductions, or
conclusions of law. (Blank v. Kirwan
(1985) 39 Cal.3d 311, 318 (Blank); C & H Foods Co. v. Hartford Ins. Co.
(1984) 163 Cal.App.3d 1055, 1062.) It is well settled that a “demurrer lies
only for defects appearing on the face of the complaint[.]” (Stevens v. Superior Court (1999) 75
Cal.App.4th 594, 601.) “The rules by which the sufficiency of a complaint is
tested against a general demurrer are well settled. We not only treat the
demurrer as admitting all material facts properly pleaded, but also give the
complaint a reasonable interpretation, reading it as a whole and its parts in
their context.” (Guclimane Co. v. Stewart
Title Guaranty Co. (1998) 19 Cal.4th 26, 38 (internal quotes omitted).) For
purposes of ruling on a demurrer, the complaint must be construed liberally by
drawing reasonable inferences from the facts pleaded. (Wilner v. Sunset Life Ins. Co. (2000) 78 Cal.App.4th 952, 958.)
When ruling on a demurrer, the
Court may only consider the complaint’s allegations or matters which may be
judicially noticed. (Blank, supra, 39
Cal.3d at 318.) The Court may not consider any other extrinsic evidence or
judge the credibility of the allegations plead or the difficulty a plaintiff
may have in proving his allegations. (Ion
Equip. Corp. v. Nelson (1980) 110 Cal.App.3d 868, 881.) A demurrer is
properly sustained only when the complaint, liberally construed, fails to state
facts sufficient to constitute any cause of action. (Kramer v. Intuit Inc. (2004) 121 Cal.App.4th 574, 578.)
Cross-Defendant Frankel is a partner of Cross-Complainant
Holiday Villa East (HVE). (FACC ¶ 3.) Cross-Complainant Diller Floor Covering
is a managing partner in HVE. (FACC ¶ 2.)
Frankel’s alleged wrongdoing took place in connection with
sale of the 10% partnership interest of Henry Frydrych in HVE. (FACC ¶ 14.)
Henry passed away in July 2017; upon his death, a dispute arose between Henry’s
Estate and HVE as to whether Henry was automatically dissociated from HVE upon
his death. (FACC ¶ 17.) If so, HVE would be obligated to buyout Henry’s
interest for full market value, and Henry’s Estate would not be able to sell
the interest to any other party. (FACC ¶ 17.)
In December 2017, Henry’s sons approached Arthur Diller,
President of Diller Floor Covering and a managing partner in HVE, to ask on
behalf of the Estate whether HVE or any of its partners were interested in
buying Henry’s interest. (FACC ¶ 18.) Diller contacted Frankel to inform him
that the Estate was interested in selling the interest for approximately $1
million, and asked Frankel (a CPA with experience valuing businesses) to
negotiate on behalf of HVE to purchase the interest and resolve the
dissociation dispute. Frankel agreed to do so, and also told Arthur that he did
not know what the interest was worth. (FACC ¶ 18.) However, Frankel concealed
from HVE that he valued the interest at $1.6 to $2 million and that he sought
to purchase Henry’s interest for himself and his sister, Sara Friedman,
leveraging his knowledge and control of HVE’s negotiations for his own benefit.
(FACC ¶ 19.) While also serving as HVE’s negotiator with the Estate, Frankel
approached Henry’s sons with an offer to buy the interest for himself and
Friedman for more than the $1 million offered by HVE. (FACC ¶ 25.)
On February 26, 2018, Frankel and Henry’s sons formed an
agreement for Frankel, Friedman, and their spouses to buy the Estate’s interest
for $1.3 million. (FACC ¶ 26.) Friedman informed Diller of the agreement on
March 2, 2018. (FACC ¶ 27.) HVE’s counsel then advised Frankel and Friedman
that HVE also wanted to purchase the interest for $1.3 million, and claimed
that HVE was entitled to a Right of First Refusal to purchase the interest at
the price offered. (FACC ¶¶ 28, 30.) However, Frankel refused to consent to the
Partnership paying over $1 million to acquire the interest. (FACC ¶ 33.)
The parties proceeded to arbitrate the issue of Henry’s
dissociation, and whether Henry’s Estate would be entitled to be paid the full
fair market value of the interest by HVE. (FACC ¶ 36.) In August 2018, the
arbitrator determined that Henry Frydrych dissociated on his death, and that
upon dissociation HVE was obligated to buy his interest for its full fair
market value. (FACC ¶¶ 38-39.) An appraisal completed in January 2019 found
that the value of the interest was $810,000, and HVE then paid the Estate that
amount plus interest owed, for a total of $929,391.77. (FACC ¶ 41.)
The Estate then claimed that its interest was valued at $2.3
million and demanded to arbitrate the fair market value. (FACC ¶ 44.) During
the arbitration, Frankel testified that he believed the interest was valued at
$1.6 to $2 million. (FACC ¶ 45.) The arbitrators concluded on December 8, 2020,
that the buyout price would be $1,680,000 plus interest accrued since Henry’s
death, and so HVE paid the Estate an additional sum of $1,163,000. (FACC ¶ 48.)
The FACC asserts six causes of action against Frankel, for:
(1) Breach of Fiduciary Duty; (2) Breach of Contract; (3) Breach of the Implied
Covenant of Good Faith and Fair Dealing; (4) Fraud and Concealment; (5)
Dissociation of Partner (Corporations
Code Section 16601(5)(A)); and (6) Dissociation of Partner (Corporations Code Section
16601(5)(B))
Statute of limitations
Frankel
argues that the first cause of action for Breach of Fiduciary Duty and the
fourth cause of action for Fraud and Concealment are barred by the statute of
limitations.
Actions for fraud are subject to a three-year statute
of limitations. (Code Civ. Proc. § 338, subd.
(d).) “The statute of limitations for breach
of fiduciary duty is three years or four years, depending on whether the breach
is fraudulent or nonfraudulent.” (American Master Lease LLC v. Idanta Partners, Ltd. (2014) 225 Cal.App.4th 1451, 1479.)
“Generally speaking, a cause of action accrues at
‘the time when the cause of action is complete with all of its elements.’ ” (Fox
v. Ethicon Endo–Surgery, Inc. (2005) 35 Cal.4th 797, 806.) “When damages are an element of a cause of
action, the cause of action does not accrue until the damages have been
sustained.” (City of Vista v. Robert Thomas Securities, Inc. (2000) 84
Cal.App.4th 882, 886; see Choi v. Sagemark Consulting (2017) 18
Cal.App.5th 308, 323 [“If the last element to occur in a tort
action is damages, the statute of limitations
begins to run on the occurrence of ‘appreciable and actual harm, however
uncertain in amount,’ that consists of more than nominal damages”].)
Here, Frankel’s alleged breach of
fiduciary duty involved fraud, and so the three-year statute of limitations
applies to the first and fourth causes of action.
Cross-Complainants’ alleged damages under
the first cause of action are in part for “the additional $680,000 [HVE] was
forced to pay over the $1 million amount the Estate wanted initially for the
buyout of its interest on dissociation, plus the interest, attorney’s fees and
costs” resulting from the dispute with Frankel. (FACC ¶ 57.)
Because the element of damages was the
last to occur, “the statute of limitations begins to run on the occurrence of
‘appreciable and actual harm, however uncertain in amount,’ that consists of
more than nominal damages.” (Choi, supra, 18 Cal.App.5th at 323.) Those damages
first occurred, and so the action was complete, when the initial arbitration
determined that Plaintiff was obligated to buy out the Estate’s interest for
full market value. (FACC
¶¶ 38-39.) The ruling was made on August 30, 2018,
and HVE received notice of it on September 4, 2018. (FACC ¶ 43.) The Court thus
finds that the three-year statute of limitations began to run on September 4,
2018.
Emergency rule 9, adopted by the Judicial
Council in response to the COVID-19 pandemic, tolled the statute of limitations
for civil causes of action with limitations periods over 180 days, from April
6, 2020 until October 1, 2020. (See
People v. Financial Casualty & Surety, Inc. (2021) 73 Cal.App.5th
33, 39.) Applying rule 9, the statute of limitations for the first and fourth
causes of action expired on March 1, 2022.
Because Cross-Complainants’ claims in the FACC “arise
out of the same transaction, occurrence, or series of transactions or
occurrences as the cause of action which the plaintiff alleges in his
complaint,” they relate back to the filing of Frankel’s original complaint on March
4, 2022, three days after the limitations period expired. (Trindade v. Superior Court (1973) 29
Cal.App.3d 857, 860; Code Civ. Proc. § 426.10.)
Cross-Complainants
argue that the claims are not time-barred based on the application of equitable
tolling, through HVE’s filing of a Demand for Arbitration on January 7, 2022.
The Court agrees.
“Equitable tolling stops the statute
of limitations from expiring when a
plaintiff has
remedies in addition
to state court.
[Citation.] Equitable tolling has three elements. [Citations.] First, timely
notice to the defendant of the claim within the statutory period; ordinarily,
such notice occurs when the plaintiff files in the other forum. Second, lack of
prejudice to the defendant in gathering and preserving evidence for its
defense. And third, the plaintiff's reasonableness and good faith in pursuing
the claim in the other forum.” (Mojica v. 4311 Wilshire, LLC (2005) 131
Cal.App.4th 1069, 1073; see Lantzy v. Centex Homes (2003) 31 Cal.4th
363, 369-70.)
HVE’s January 7, 2022
Demand for Arbitration provided Frankel notice of Cross-Complainants’ claims
within the statutory period. (HVE Motion to Compel Arbitration (filed 4-13-22),
McMillan Decl. ¶ 3, Ex. A.) The Court previously ordered HVE’s claims in arbitration
to be consolidated with this action on June 17, 2022. Given Frankel’s prior
notice of Cross-Complainants’ claims, there is no indication that applying
equitable tolling here would prejudice Frankel in gathering or preserving
evidence, and HVE’s pursuit of their claims via arbitration appears to have
been reasonable and in good faith. The Court thus finds that HVE’s filing of
its Demand for Arbitration on January 7, 2022 supports the application of
equitable tolling, bringing the claims within the applicable statutes of
limitations.
First Cause of
Action for Breach of Fiduciary Duty
“The
elements of a cause of action for breach of fiduciary duty are: (1) existence
of a fiduciary duty; (2) breach of the fiduciary duty; and (3) damage
proximately caused by the breach.” (Stanley v. Richmond (1995) 35
Cal.App.4th 1070, 1086.) “‘[B]efore a person can be charged with a fiduciary
obligation, he must either knowingly undertake to act on behalf and for the
benefit of another, or must enter into a relationship which imposes that
undertaking as a matter of law.” [Citations].’ (City of Hope National
Medical Center v. Genentech, Inc. (2008) 43 Cal.4th 375, 386.)
A partner
owes the fiduciary duties of loyalty and care to the partnership and other
partners. (Corp. Code § 16404, subd. (a).) The fiduciary duty of loyalty
includes the duty “[t]o refrain from dealing with the
partnership in the conduct or winding up of the partnership business as or on
behalf of a party having an interest adverse to the partnership.” (Corp. Code,
§ 16404, subd. (b)(2).) This duty “applies only to situations where one partner
could take advantage of his position to reap personal profit or act to the
partnership's detriment.” (Crouse v. Brobeck, Phleger & Harrison
(1998) 67 Cal.App.4th 1509, 1551.)
Here, Frankel’s
alleged self-dealing is sufficient to show breach of the fiduciary duty of
loyalty owed by him as partner to HVE, the partnership, and to Diller Floor
Covering, another partner. Frankel argues that his alleged conduct was
permissible, citing the rule that “[a] partner does not violate [his or her
fiduciary duties] merely because the partner's conduct furthers the partner's
own interest.” (Corp. Code, § 16404, subd. (e).) However, “[t]he apparent purpose of this provision ... is to excuse
partners from accounting for incidental benefits obtained in the course of
partnership activities without detriment to the partnership.” (Agam
v. Gavra (2015) 236 Cal.App.4th 91, 113.) Frankel’s alleged conduct was
detrimental to Cross-Complainants, insofar as Frankel usurped HVE’s purchase of
the Estate’s interest, blocked HVE’s acceptance of the $1.5 million offer in
bad faith, and conspired with the Frydrych sons to drive up the price of the
Estate’s interest. (FACC ¶ 49.) The Court also finds these alleged facts
sufficient to support the element of causation. Accordingly, the demurrer is overruled as to
the first cause of action.
Second Cause of Action for Breach of Contract; Third Cause
of Action for Breach of Implied Covenant of Good Faith and Fair Dealing
“The elements of a cause of action for breach of
a partnership agreement are: (1) the partnership agreement; (2) plaintiff's
performance or excuse for nonperformance; (3) defendant's breach; and (4) the
resulting damages to plaintiff.”
(Jones v. Goodman (2020) 57 Cal.App.5th 521, 527 fn 2.)
“ ‘Every contract imposes upon each party a duty of good
faith and fair dealing in its performance and its enforcement.’ [Citation.] . .
. The covenant of good faith finds particular application in situations where
one party is invested with a discretionary power affecting the rights of
another. Such power must be exercised in good faith.” (Carma
Developers (Cal.), Inc. v. Marathon Development California, Inc. (1992) 2
Cal.4th 342, 371-72.) “
“The covenant of good faith and fair dealing, implied by law
in every contract, exists merely to prevent one contracting party from unfairly
frustrating the other party’s right to receive the benefits of the agreement
actually made. The covenant thus cannot ‘be endowed with an existence
independent of its contractual underpinnings.’ It cannot impose substantive
duties or limits on the contracting parties beyond those incorporated in the
specific terms of their agreement.” (Guz v. Bechtel National, Inc.
(2000) 24 Cal.4th 317, 349-350.) “ ‘Violation of an express provision is not,
however, required. [Citation.] ‘Nor is it necessary that the party's conduct be
dishonest. Dishonesty presupposes subjective immorality; the covenant of good
faith can be breached for objectively unreasonable conduct, regardless of the
actor's motive.’ [Citation.] ‘A party violates the covenant if it subjectively
lacks belief in the validity of its act or if its conduct is objectively
unreasonable.’ ” (Moore v. Wells Fargo Bank, N.A.
(2019) 39 Cal.App.5th 280, 291.) “The issue of whether the implied
covenant of good faith and fair dealing has been breached is ordinarily ‘a
question of fact unless only one inference [can] be drawn from the evidence.’ ”
(Ibid.)
Under the second cause of action, Cross-Complainants allege
that Frankel’s breach of his fiduciary duties to HVE also constituted a breach
of the terms of HVE’s Partnership Agreement. (FACC ¶¶ 61-62.) The third cause
of action for Breach of Implied Covenant of Good Faith and Fair Dealing alleges
that Frankel’s misconduct breached the implied covenant in the Partnership
Agreement. (FACC ¶ 70.)
The Court agrees with Frankel that the FACC fails to allege
Frankel’s breach of any term of the Partnership Agreement. Cross-Complainants
argue that Frankel’s breach of fiduciary duty necessarily supports a cause of
action for breach of contract, because the fiduciary duty of loyalty is implied
into the Partnership Agreement by Corporations Code § 16103, subd. (a) (“[R]elations among
the partners and between the partners and the partnership are governed by the
partnership agreement. To the extent the partnership agreement does not
otherwise provide, this chapter governs relations among the partners and
between the partners and the partnership”).
However, a partner’s fiduciary duties of loyalty “are
imposed by law, and their breach sounds in tort.” (Enea v. Superior
Court (2005) 132 Cal.App.4th 1559, 1566.) Frankel’s alleged breach of his
fiduciary duty of loyalty is not equivalent to a breach of a term of the
parties’ Partnership Agreement. Accordingly, the demurrer is sustained as to
the second and third causes of action.
Fourth Cause of
Action for Fraudulent Concealment
The required elements for fraudulent
concealment are: “(1) concealment or suppression of a material fact; (2) by a
defendant with a duty to disclose the fact to the plaintiff; (3) the defendant
intended to defraud the plaintiff by intentionally concealing or suppressing
the fact; (4) the plaintiff was unaware of the fact and would not have acted as
he or she did if he or she had known of the concealed or suppressed fact; and
(5) plaintiff sustained damage as a result of the concealment or suppression of
the fact.” (Graham v. Bank of America, N.A. (2014) 226 Cal.App.4th 594,
606 (Graham.)
Cross-Complainants’ fourth cause of
action alleges that Frankel concealed from Cross-Complainants his valuation of
the Estate’s interest and his intention to negotiate for himself and Friedman
to purchase the interest, while also serving as HVE’s negotiator. (FACC ¶ 77.)
Frankel demurs on the basis that the cause of action is barred by the statute
of limitations; as discussed above, the cause of action is not time-barred
based on equitable tolling. Accordingly, the demurrer is overruled as to the
fourth cause of action.
Fifth and Sixth
Causes of Action for Dissociation of Partner
On
application by the partnership or another partner, a partner may be dissociated
from a partnership via judicial determination because of any of the following:
(A) The partner engaged in wrongful conduct that adversely and
materially affected the partnership business.
[…]
(C) The partner engaged in conduct relating to the partnership
business that makes it not reasonably practicable to carry on the business in
partnership with the partner.
(Corp. Code §
16601, subd. (5).)
Frankel argues that the dissociation
of partner claims fail because he did not engage in any wrongful conduct, again
relying on Corp. Code, § 16404, subd. (e). As discussed above, that section “excuse[s] partners from accounting for incidental benefits
obtained in the course of partnership activities without detriment to the
partnership.” (Agam, 236 Cal.App.4th at 113.) Because Frankel
alleged misconduct was detrimental to HVE, that misconduct is sufficient to
support a cause of action for partnership dissociation. The demurrer is thus overruled
as to the fifth and sixth causes of action.
Motion to Strike
Frankel moves to strike the portions
of the FACC seeking recovery of punitive damages pursuant to the first and
fourth causes of action. (FACC ¶¶ 58, 81, Prayer 5.)
Punitive damages may be imposed where it is proven by
clear and convincing evidence that the defendant has been guilty of oppression,
fraud, or malice. (Civ. Code, § 3294, subd. (a).) “To support punitive damages,
the complaint ... must allege ultimate facts of the defendant's oppression,
fraud, or malice.” (Cyrus v. Haveson (1976) 65 Cal.App.3d 306, 316-17.)
The Court finds
Frankel’s alleged misconduct sufficient to show oppression, fraud, or malice
supporting recovery of punitive damages. It is alleged that Frankel
fraudulently concealed his self-dealing from Cross-Complainants while also
agreeing to serve as HVE’s negotiator with the estate, and conspired with the
Estate to drive up the price to prevent HVE from acquiring the interest. (FACC
¶ 55.) These allegations are sufficient to show “willful
and conscious disregard of the rights” of Cross-Complainants for purposes of
pleading. (Civ. Code § 3294(c)(1).)