Judge: Barbara M. Scheper, Case: 22STCV09571, Date: 2022-09-26 Tentative Ruling

Case Number: 22STCV09571    Hearing Date: September 26, 2022    Dept: 30

Dept. 30

Calendar No.

Home Silk Shop, Inc. vs. Boughton, et. al., Case No. 22STCV09571 

Tentative Ruling re:  Defendants’ Demurrer to First Amended Complaint

Defendants Sally Anne Boughton (Boughton), as Sole Successor Trustee of the Boughton Charitable Trust Executed on May 26, 1993, as Amended (the Trust), and Kimberly Olson (Olson) (collectively, Defendants) demur to the First Amended Complaint (FAC) of Plaintiff Home Silk Shop, Inc. (Plaintiff). The demurrer is sustained without leave to amend.

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 p. 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.)

Plaintiff’s claims arise out of an alleged Sale, Purchase, and Escrow Agreement (the Agreement) between Plaintiff and Boughton executed on December 28, 2021, for the property located at 610-660 Maple Avenue, Torrance, California (the Property). (FAC ¶¶ 8-11; Ex. A.)  Plaintiff sought to purchase the Property to use as a replacement property for an Internal Revenue Code Section 1031 Exchange. (FAC ¶ 9.) Defendant Kimberly Olson (Olson) is the attorney in fact for the Trust acting under power of attorney for Boughton, and is named in the Agreement as the property manager. (FAC ¶ 5.)

Plaintiff independently obtained a title survey of the Property on January 24, 2022. (FAC ¶ 15.) The survey revealed multiple issues with the title, two of which remain unresolved: (1) An easement for water drainage rights flowing from the Property through to the neighboring property eastwards (the Hawaii Property); and (2) an issue involving pedestrian doors leading directly from the Property to the Hawaii Property. (FAC ¶¶ 15-16.)

When Plaintiff raised these issues to Defendants through Olson, Olson’s response indicated to Plaintiff that Defendants were aware of the issues before the Agreement was executed, even though they did not disclose those issues to Plaintiff. (FAC ¶ 18.)

The parties subsequently began to explore solutions for curing the title issues. (FAC ¶¶ 19-20.) On February 1, 2022, the parties executed a First Amendment to the Agreement extending the due diligence period to February 8. (FAC ¶ 21; Ex. B.) The First Amendment also provided that “Purchaser and Seller agree that Seller was aware of the exiting and waterflow issues but was not aware that these issues would impact title to the Property or be shown as disclosures in a pro forma or final owner’s policy.” (FAC ¶ 25.)

During negotiations over the First Amendment, Olson revealed for the first time that she was co-beneficiary of the trust that owned the Hawaii property, along with her sister. (FAC ¶ 22.) Olson suggested that her sister might be opposed to granting a water access easement in favor of the Property. (FAC ¶ 22.) Based on this representation, Plaintiff agreed to language in the First Amendment providing that the owner of the Hawaii Property may object to egress from the Property to the Hawaii Property and drainage from the Property to the Hawaii Property. (FAC ¶ 24; Ex. B, § E.) However, Plaintiff later learned that Olson herself singularly controlled the decision as to whether or not the Hawaii Property would provide the water access easement. (FAC ¶ 23.) Defendants also allegedly misrepresented their understanding of the impact the water run-off and egress issues would have on the title, in the hope that the conditions would remain undiscovered. (FAC ¶ 26.) Though Plaintiff sought to directly contact the trustee of the trust that held the Hawaii Property regarding the easement issues, Defendants told Plaintiff not to have any direct communications with the Trustee. (FAC ¶ 22.)

Plaintiff retained engineers to analyze the water run-off issue, and found that construction to solve the issue would cost them $100,000 to $500,000. (FAC ¶ 28.) After Plaintiff sent a message on February 4, 2022 that it would cancel the purchase if the easements were not obtained, Defendants informed Plaintiff that the owner of the Hawaii Property had approved an easement for the door egress issue, and that Olson would seek an easement over the Hawaii Property for the water flow issue. (FAC ¶ 29.)

The parties executed a Second Amendment on February 7, 2022, which extended the due diligence period through February 15. (FAC ¶ 31, Ex. C.) Defendants then informed Plaintiff that the Hawaii Property would grant the water access easement, but that the easement would only be delivered after February 12, 2022, which was the final date for Plaintiff to identify a replacement property for the 1031 Exchange. (FAC ¶¶ 32-33.) Plaintiff, in reliance on Defendants’ representation that the water easement would be obtained, identified the Property as the replacement property for the 1031 Exchange on February 12. (FAC ¶ 32.)

Under the terms of the Second Amendment, Plaintiff was required to deliver the signed Purchaser Approval form to Defendants by February 15, 2022. (FAC ¶ 35.) Plaintiff did not deliver the form by that date, and negotiations continued through February 17 over the water access easement. (FAC ¶¶ 35-37.) However, Plaintiff alleges that Defendants had no intention of providing the water access easement. (FAC ¶ 37.) On February 17, Defendants wrote to the escrow company that the sale of the Property had been terminated based on Plaintiff missing the deadline for delivery of the Purchaser Approval form. (FAC ¶ 38.)

It is alleged that Defendants falsely represented that they were willing to provide the water access easement to induce Plaintiff into identifying the Property for the 1031 Exchange, in order to obtain leverage over Plaintiff to later re-negotiate the sales price for the Property. (FAC ¶ 39.)

First Cause of Action for Breach of Contract – Specific Performance

Defendants demur to the first cause of action for Breach of Contract – Specific Performance against Boughton on the grounds that Plaintiff has failed to allege any breach of the contract.

The elements of a cause of action for breach of contract are: (1) the contract, (2) plaintiff's performance or excuse for nonperformance, (3) defendant's breach, and (4) the resulting damages to plaintiff. (Coles v. Glaser (2016) 2 Cal.App.5th 384, 391.) “The rules governing the role of the court in interpreting a written instrument are well established. The interpretation of a contract is a judicial function. [Citation.] In engaging in this function, the trial court ‘give[s] effect to the mutual intention of the parties as it existed’ at the time the contract was executed. [Citation.] Ordinarily, the objective intent of the contracting parties is a legal question determined solely by reference to the contract's terms. [Citation.]” (Wolf v. Walt Disney Pictures & Television (2008) 162 Cal.App.4th 1107, 1125-1126.)

Plaintiff’s first cause of action for breach of contract against Defendant Sally Anne Boughton (Boughton) seeks specific performance of the Agreement pursuant to Section 10.2. Under that section, if the sale was not completed because of any “Material Fact Revision,” Plaintiff is entitled to either terminate the Agreement, or, alternatively, treat the Agreement as being in full force and effect and pursue specific performance. (FAC ¶ 40, Ex. A, p. 14.) If Plaintiff fails to elect its choice of remedy “by written notice delivered to [Seller] on or before the forty-fifth (45th) day following the Final Closing Date, [Plaintiff] shall be deemed to have irrevocably elected the remedy under clause (i) above [termination].” (Ibid.)

The claim for specific performance fails because Plaintiff alleges that it did not timely deliver the Purchaser’s Approval Notice. Under Section 5.3.1 of the Agreement, if Plaintiff fails to deliver an executed Purchaser’s Approval Notice prior to the Inspection Deadline, “such failure shall be conclusively deemed to be [Plaintiff’s] election to terminate this Agreement, in which case the Escrow Holder shall refund the Deposit and all interest earned thereon to Purchaser and the parties shall have no further obligations under this Agreement (except those obligations, if any, which specifically survive the termination of this Agreement).” (FAC Ex. B, p. 8.) The FAC alleges that Plaintiff did not deliver the signed Purchaser’s Approval Notice by the extended Inspection Deadline on February 15, 2022. (FAC ¶¶ 35-37.) Under the terms of the Agreement, Plaintiff’s failure to timely deliver the notice terminated the contract, precluding a claim for specific performance.

Plaintiff argues that it was excused from delivering the Purchaser’s Approval Notice because Defendants induced Plaintiff to not deliver the notice, through its promise to eventually provide the water access easement and by continuing to negotiate the easement through and past the February 15 Inspection Deadline.

“[W]here one contracting party prevents the other's performance of a condition precedent, the party burdened by the condition is excused from performing it, and the benefited party's duty of performance becomes unconditional.” (City of Hollister v. Monterey Ins. Co. (2008) 165 Cal.App.4th 455, 490; Civ. Code § 1511, subd. (a).) “Of course, if the contract expressly allows the defendant's act that prevents performance of the condition, the plaintiff has no cause for complaint, because he or she has assumed the risk.” (1 Witkin, Summary 11th (2022) Contracts § 846 [citing Kline v. Johnson (1953) 121 Cal.App.2d Supp. 851, 854].)

The FAC does not plead facts showing that Defendants prevented Plaintiff’s performance of the Purchaser’s Approval Notice requirement. It is alleged that Plaintiff decided not to deliver the notice because Plaintiff did not want to purchase the property while the title issue was still ongoing, and because Plaintiff expected that Defendants would eventually provide the water access easement. (FAC ¶ 53.) The allegations that Defendants represented that they would provide the easement and that Defendants continued to negotiate over that issue past the deadline do not show that Defendants prevented Plaintiff’s delivery of the Notice.

Furthermore, the First Amendment to the Agreement expressly provides that the owner of the Hawaii Property may prohibit the desired easements, that Olson may also “object to the creation of drainage easements over the Hawaii Property,” and that the parties would agree “that any objection by Kimberly Olson, as a co-beneficiary, shall not be deemed to be bad faith or unreasonableness of the Seller.” (FAC Ex. B, § E.) Given that the contract expressly provided that Defendants may not have obtained the easement, Plaintiff assumed that risk and so cannot claim excuse on that basis.

Therefore, the demurrer is sustained to the first cause of action.

Second Cause of Action for Breach of Contract

Plaintiff’s second cause of action for Breach of Contract is asserted against all Defendants. Under this claim, Plaintiffs allege that “Boughton did not comply with her disclosure obligations in connection with the information actually known by her concerning the [Property],” and “failed to provide to Plaintiff all of the Seller’s Due Diligence Materials within the time specified in the [Agreement], or at all.” (FAC ¶ 49.) Plaintiffs further allege that Defendants breached Section 11.1 of the Agreement by failing to disclose to Plaintiff the ownership of the Hawaii Property and Olson’s power to approve or reject the access easement rights, and that Olson did not in good faith attempt to obtain the necessary easements. (FAC ¶ 50.)

Under Section 5.4 of the Agreement, when the Agreement is terminated under Section 5.3, “Purchaser [Plaintiff] shall be entitled to obtain the return of the Deposit and all interest earned thereon and, upon Purchaser’s receipt . . . , all further rights and obligations of the parties shall cease and terminate without any further liability of either party to the other (except those obligations, if any, which are specifically provided to survive such termination as provided in this Agreement).” (FAC, Ex. A, p. 9.)

Because Plaintiff did not timely deliver the Purchaser’s Approval Notice by the Inspection Deadline, the Agreement was terminated under Section 5.3. (FAC, Ex. A, p. 8.) On termination of the Agreement all rights and obligations of the parties also terminated “without any further liability of either party to the other,” except where the Agreement provides that the obligations are to survive termination. Defendants’ obligation under Section 5.1 of the Agreement to provide Due Diligence Materials is not one specified as surviving the termination of the Agreement.

Plaintiff’s allegation that Defendants failed to disclose the ownership of the Hawaii Property is contradicted by the First Amendment, which states that the Hawaii Property is owned by a charitable trust of which Olson is co-beneficiary. (FAC, Ex. B, § E.) The allegation that Olson did not make a good faith attempt to obtain the easement is also inconsistent with the First Amendment, as it provides that Olson “may object to the creation of drainage easements over the Hawaii Property,” and that “Purchaser and Seller agree that any objection by Kimberly Olson, as a co-beneficiary, shall not be deemed to be bad faith or unreasonableness of the Seller.” (Ibid.)

In addition, the claim fails as stated against Olson because she was not a party to the Agreement. Plaintiff argues that Olson may be liable under Section 11.1 of the Agreement, which names Olson as property manager and imputes her knowledge to Defendants for purposes of that section; however, Section 11.1 also states that Olson was “without any duty or obligation to investigate, inquire, inspect, or audit any such matters [regarding the Property], and there shall be no personal liability on the part of such property manager.” (FAC Ex. B.)

Therefore, the demurrer is sustained as to the second cause of action.

Third and Fourth Causes of Action for Intentional Misrepresentation and Concealment

            The elements of fraud are: (1) misrepresentation (false representation, concealment, or nondisclosure); (2) knowledge of falsity (scienter); (3) intent to defraud or induce reliance; (4) justifiable reliance; and (5) damages. (See Civil Code §1709.) Fraud actions are subject to strict requirements of particularity in pleading. (Committee on Children’s Television, Inc. v. General Foods Corp. (1983) 35 Cal.3d 197, 216.) “The particularity requirement demands that a plaintiff plead facts which show how, when, where, to whom, and by what means the representations were tendered.” (Cansino v. Bank of America (2014) 224 Cal.App.4th 1462, 1469.) 

            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.) The rule of specificity of pleading is intended to apply only to affirmative representations and not to fraud by concealment. (Alfaro v. Community Housing Improvement System & Planning Assn., Inc. (2009) 171 Cal.App.4th 1356, 1384; Jones, 198 Cal.App.4th at 1199-1200.)

            To adequately allege reliance, “[t]he plaintiff must plead that he believed the representations to be true . . . and that in reliance thereon (or induced thereby) he entered into the transaction.” (Younan v. Equifax Inc. (1980) 111 Cal.App.3d 498, 513; see Beckwith, 205 Cal.App.4th at 1063.) “Except in the rare case where the undisputed facts leave no room for a reasonable difference of opinion, the question of whether a plaintiff's reliance is reasonable is a question of fact.”  (Alliance Mortgage Co. v. Rothwell (1995) 10 Cal.4th 1226, 1239.)

Plaintiff’s Third Cause of Action for Intentional Misrepresentation and Fourth Cause of Action for Concealment are both based on Defendants’ alleged misrepresentations and concealment of facts regarding (1) the existence and materiality of the water run-off and egress issues; (2) Defendants’ and particularly Olson’s ability to obtain approval for the easements; and (3) Defendants’ good faith efforts to obtain approval for the water access easement. (FAC ¶ 54.) Defendants made these representations “with the specific intention of luring Plaintiff into identifying the Subject Property as the replacement property for the 1031 Exchange by February 12, 2022 . . . knowing that Plaintiff would stand to lose millions of dollars in tax liabilities and would therefore be highly motivated to proceed on the closing the Subject Property on new and less favorable terms.” (FAC ¶¶ 55, 61.) In reliance on Defendants’ misrepresentations and concealment, Plaintiff entered into the First and Second Amendments, identified the Property for the 1031 Exchange on February 12, and withheld delivery of the Purchaser’s Approval form before February 15, 2022. (FAC ¶¶ 57, 63.)

The Court sustained Defendants’ demurrer to these causes of action as alleged in the original Complaint on the basis that Plaintiff failed to plead reasonable reliance on Defendants’ alleged misrepresentations and concealment. This issue is still present in the FAC. The First Amendment to the Agreement states that the owner of the Hawaii Property may prohibit egress from the Property to the Hawaii Property and drainage from the Property to the Hawaii Property.” It further provides that Olson “may object to the creation of drainage easements over the Hawaii Property,” and that the parties would agree “that any objection by Kimberly Olson, as a co-beneficiary, shall not be deemed to be bad faith or unreasonableness of the Seller.” (FAC ¶ 24; Ex. B, § E.) These provisions explicitly contemplate the possibility that Defendants would not secure the easement and that Olson would object to the easement. Plaintiff’s agreement to those provisions contradicts Plaintiff’s claim of reasonable reliance on Defendant’s representations that it would obtain the easement, and on Olson’s perceived inability to secure the easement. Furthermore, the FAC alleges that Plaintiff had knowledge of the title issues on January 24, 19 days prior to the deadline for designating a property in the 1031 Exchange. Based on the facts pled, Plaintiff’s reliance on Defendant’s representations was not reasonable as a matter of law.