Judge: Bruce G. Iwasaki, Case: 23STCV25014, Date: 2024-02-06 Tentative Ruling
Case Number: 23STCV25014 Hearing Date: February 6, 2024 Dept: 58
Hearing
Date: February 6, 2024
Case
Name: 819 Flower, LP v.
Luxurban RE Holdings, LLC
Case
No.: 23STCV25014
Matter: Demurrer
Moving
Party: Defendants
LuxUrban RE Holdings, LLC and LuxUrban Hotels Inc.
Responding
Party: Plaintiff 819 S. Flower, LP
Tentative Ruling: The
Demurrer to the Complaint is sustained with leave to amend as to the first and
fourth causes of action, sustained without leave to amend as to the second
cause of action against Defendant LuxUrban, Inc. only, and overruled as to the
third cause of action.
This action arises from a commercial landlord
tenant dispute. On March 15, 2023, Plaintiff 819 S. Flower, LP (Plaintiff) and Defendants
LuxUrban RE Holdings, LLC and LuxUrban Hotels Inc. (Defendants) entered into a commercial
lease to operate a hotel (Original Lease). The Complaint alleges that
Defendants made a number of fraudulent representations to induce Plaintiff to
enter into this Original Lease. As a result of these representations and
failures to comply with the terms of the Original Lease, the parties negotiated
a new lease agreement (Restatement); Defendants signed the Restatement, but
Plaintiff never signed the agreement. Thereafter, the Complaint alleges, Defendants
repeatedly breached the terms of the Restatement.
On October 13, 2023, Plaintiff filed
a Complaint for (1.) rescission, (2.) breach of the Restatement, (3.) declaratory
relief, (4.) ejectment, and (5.) breach of guaranty.
On December 15, 2023, Defendants filed
a demurrer the Complaint. Plaintiff filed an opposition to the demurrer.
The demurrer
is overruled in part and sustained in part.
Plaintiff’s
request for judicial notice of Exhibit A is denied. Defendants’ request for judicial
notice of Exhibits A-B are granted. (Evid. Code, § 452, subd. (d).)
Legal Standard for
Demurrers
A demurrer is an objection to a
pleading, the grounds for which are apparent from either the face of the
complaint or a matter of which the court may take judicial notice. Code
Civ. Proc. § 430.30, subd. (a); see also Blank v. Kirwan (1985) 39
Cal.3d 311, 318.) The purpose of a demurrer is to challenge the
sufficiency of a pleading “by raising questions of law.” (Postley v.
Harvey (1984) 153 Cal.App.3d 280, 286.) “In the construction of a
pleading, for the purpose of determining its effect, its allegations must be
liberally construed, with a view to substantial justice between the parties.”
(Code Civ. Proc. § 452.) The court “ ‘ “treat[s] the demurrer as admitting
all material facts properly pleaded, but not contentions, deductions or
conclusions of fact or law . . . .” ’ ” (Berkley v. Dowds (2007)
152 Cal.App.4th 518, 525.) In applying these standards, the court
liberally construes the complaint to determine whether a cause of action has
been stated. (Picton v. Anderson Union High School Dist. (1996) 50
Cal.App.4th 726, 733.)
Discussion
Defendants demur to the first
through fourth causes of action on the grounds that each cause of action fails
to state a claim.
First Cause of Action for Rescission:
Defendants argue that the first cause
of action for rescission fails to state a claim.
The pertinent
factual allegations for rescission claim are found in Paragraph 19 of the
Complaint. Plaintiff alleges that Defendants made the “fraudulent representations”
regarding Defendants’ “prior experience, qualifications and ability to operate
the Premises,” that Defendants would “faithfully perform all of their
obligations under the Original Lease,” Defendants had “ample access to funds
sufficient to pay their monetary obligations under the Original Lease to
Plaintiff,” and, lastly, Defendants concealed from “Plaintiff the fact that
Defendants were at the time subject to multiple lawsuits around the country
arising from their failure to properly or lawfully operate other properties.”
(Compl., ¶ 19.)
The
Complaint also seeks to rescind the Restatement based on the Defendants’ re-assertion
that its original representations were accurate, and that Defendants were
qualified to operate the hotel. (Compl., ¶ 23.)
First, Defendants
argue that the remedy of rescission is not available under the terms of the
Original Lease because Plaintiff did not comply with the notice requirements of
Articles 15 and 24 of the Original Lease, which permits Plaintiff to terminate
the Original Lease based only upon certain conditions precedent.
Specifically, Article 24 requires written
notice of the alleged rescission in the manner required by Article 24.
Defendants argue it is “undisputed” that Plaintiff did not provide notice in
compliance with the terms of Original Lease. Further, under Article 15,
Plaintiff was required to provide Defendants with a 10-day written notice prior
to terminating the Original Lease.
Defendants’
argument misses the point of relief for rescission. Plaintiff’s request for rescission
is not governed by the terms of the contract to be rescinded. That is, “[r]escission”
is a “retroactive termination” of a contract, as compared to “cancellation,”
which is a “prospective termination.” (Barrera v. State Farm Mut. (1969)
71 Cal.2d 659, 663, fn. 3.) “The consequence of rescission is not only the
termination of further liability, but also the restoration of the parties to
their former positions by requiring each to return whatever consideration has
been received.” (Imperial Casualty & Indemnity Co. v. Sogomonian
(1988) 198 Cal.App.3d 169, 184.)
Where
a party is seeking to rescind a contract based on fraud, it is as if the contract
was never executed. In contrast to a breach of contract claim, Defendants cite
no legal authority that a party must show compliance with the terms of a
contract that the other party is seeking to rescind. Moreover, as the
opposition argues, the demurrer argument adds facts not contained within the
pleadings; that is, Defendants argue Plaintiff did not comply with various
provisions of the Original Lease but fail to identify any allegation in the
Complaint corroborating this demurrer argument.
Nonetheless,
Defendants also argue Plaintiff has waived certain defects by demanding and
accepting rent from Plaintiff based on the Restatement. Contrary to the
opposition argument, this defense does not fall outside the scope of the
pleadings and instead is found on the face of the Complaint. (Compl., ¶ 15-16,
25.)
The
Court will first address rescission and waiver as to the Original Lease.
The
general rule is that a party's continued performance of the contract, even
after learning of fraud, is not a waiver. “When a party learns that he
has been defrauded, he may, instead of rescinding, elect to stand on the
contract and sue for damages, and in such case his continued performance of the
agreement does not constitute a waiver of his action for damages.” (Bagdasarian
v. Gragnon (1948) 31 Cal.2d 744, 750.) “Even though a party who elects to
affirm a contract will not be completing it in ‘reliance’ on the fraud,” his
continued performance of the contract is not a waiver. (Storage Services v.
Oosterbaan (1989) 214 Cal.App.3d 498, 511.) In other words, the act of
affirming the contract is not an act “so inconsistent with an intent to enforce
the right [to damages] as to induce a reasonable belief that such right has
been relinquished.” (Rheem Mfg. Co. v. U. S. (1962) 57 Cal.2d 621, 626.)
However,
an act that is inconsistent with an intent to enforce the right to damages is
the plaintiff's act of confirming or ratifying the contract. Ratification has
been found where a defrauded party accepts the validity of the original
contract and enters into a new, superseding agreement with the defrauder in
which the defrauded party extracts substantial benefits or concessions not
required by the original contract. (Burne v. Lee (1909) 156 Cal. 221,
227; Oakland Raiders v. Oakland-Alameda
County Coliseum, Inc. (2006) 144 Cal.App.4th 1175, 1192; Storage
Services v. C.R. Oosterbaan (1989) 214 Cal.App.3d 498, 512.) “The
authorities are uniform in holding that a party to an executory contract, who,
with full knowledge of the facts constituting the fraud complained of,
subsequently, with intention to do so, affirms the contract and recognizes it
as valid, either by his written agreement or by acts and conduct, and accepts
substantial payments, property or the performance of work or labor not required
by the original contract, thereby waives his right to damages on account of the
fraud.” (Schied v. Bodinson Mfg. Co. (1947) 79 Cal.App.2d 134, 142.) “A
waiver is properly inferred in that situation because such concessions
represent compensation for the fraud.” (Storage Services, supra, at p.
512.)
The
relevant allegations show that – after discovering Defendants’ alleged fraud in
inducing the Original Lease – Plaintiff represented that it “would only consider putting
in place a new lease to replace the Original Lease with substantial
modifications to the Original Lease to include an increased security deposit
(to protect Plaintiff’s interests), additional language concerning insurance
required to be carried by Tenant (and remedies for Tenant’s failure to do so,
including non-curable default language), and other protections within the new
lease.” (Compl., ¶ 23.) Although Plaintiff dispute signing this new lease agreement
– the Restatement – the allegations show at least some performance by both
parties on this contract.
Based on the
foregoing legal authority, Plaintiff’s claim for rescission against the Original
Lease appears to fail as a result of Plaintiff having ratified the Original
Lease by replacing it with a new contract, the Restatement. (Compl., Ex. B
[Restatement], ¶ 26.4 [“Entire Agreement. This Lease, including the
exhibits which are incorporated herein and made a part of this Lease, contains
the entire agreement between the Parties and all prior negotiations and
agreements are merged herein.”].)
The
Opposition – citing Code of Civil Procedure section 1161.1 – argues that a commercial
landlord waives “nothing” by accepting partial rent. This opposition argument fails
for two reasons. First, the allegations suggest that rent was either late or
partial – indicating that Plaintiff did more than accept only partial rent. Further,
Plaintiff overstates the language of Code of Code of Civil Procedure section
1161.1, which states, in relevant part:
“If the landlord accepts a partial
payment of rent after filing the complaint pursuant to Section 1166, the
landlord's acceptance of the partial payment is evidence only of that payment,
without waiver of any rights or defenses of any of the parties. The landlord
shall be entitled to amend the complaint to reflect the partial payment without
creating a necessity for the filing of an additional answer or other responsive
pleading by the tenant, and without prior leave of court, and such an amendment
shall not delay the matter from proceeding. However, this subdivision shall
apply only if the landlord provides actual notice to the tenant that acceptance
of the partial rent payment does not constitute a waiver of any rights,
including any right the landlord may have to recover possession of the
property.”
Here, Plaintiff’s
complaint is not a complaint pursuant to Code of Civil Procedure section 1166.
Thus, this partial rent waiver argument does not apply.
Lastly,
Plaintiff also seeks to rescind the Restatement based on fraudulent representations,
as well. However, the allegations of fraud are entirely too vague.[1]
The
claim for rescission based on fraudulent representations is essentially a claim
for promissory fraud.
Promissory
fraud or false promise “ ‘is a subspecies of the action for fraud and deceit. A
promise to do something necessarily implies the intention to perform; hence,
where a promise is made without such intention, there is an implied
misrepresentation of fact that may be actionable fraud.’ [Citations.]” (Engalla
v. Permanente Medical Group, Inc. (1997) 15 Cal.4th 951, 973–974.) “An
action for promissory fraud may lie where a defendant fraudulently induces the
plaintiff to enter into a contract.” (Lazar v. Superior Court (1996) 12
Cal.4th 631, 638.)
The elements
of promissory fraud “are: (1) a promise made regarding a material fact without
any intention of performing it; (2) the existence of the intent not to perform
at the time the promise was made; (3) intent to deceive or induce the promisee
to enter into a transaction; (4) reasonable reliance by the promisee; (5)
nonperformance by the party making the promise; and (6) resulting damage to the
promise[e].” (Behnke v. State Farm General Ins. Co. (2011) 196
Cal.App.4th 1443, 1453.)
As with any
other form of fraud, each element of a promissory fraud claim must be alleged
with particularity. (Beckwith v. Dahl (2012) 205 Cal.App.4th 1039,
1059–1060.) “A plaintiff's burden in asserting a fraud claim against a
corporate employer is even greater. In such a case, the plaintiff must ‘allege
the names of the persons who made the allegedly fraudulent representations,
their authority to speak, to whom they spoke, what they said or wrote, and when
it was said or written.’ [Citation.]” (Lazar v. Superior Court, supra,
12 Cal.4th at 645.)
Here, the
fraud allegations lack the requisite specificity and are devoid of any
specificity on who, what, where, when and how the representations were made.
Further, there is a real question whether such vague representations can even
support actionable fraud.
Thus,
the demurrer is sustained as the first cause of action because the fraud
allegations are not adequately pled. Further this first cause of action actually
comprises two separate causes of action seeking to rescind two different
contracts based on two separate allegations of misconduct. Additionally, the
claim for rescission of the Original Lease appears to fail because the
allegations show ratification of the Original Lease.
The
demurrer to the first cause of action is sustained with leave to amend.
Second Cause of
Action Breach of Contract (Restatement):
Defendant
LuxUrban, Inc. also demurs to the second cause of action for breach of the Restatement.
To
state a claim for breach of contract, a plaintiff must allege sufficient facts
to establish: (1) a contract between the parties; (2) plaintiff’s performance
or excuse for nonperformance; (3) defendant’s breach; and (4) damages to
plaintiff from the breach. (Wall Street Network, Ltd. v. New York
Times Co. (2008) 164 Cal.App.4th 1171, 1178.)
Here,
Plaintiff alleges that both Defendants breached the Restatement. (Compl., ¶¶ 27-37.)
However, only Defendant LuxUrban RE Holdings, LLC was a party to the
Restatement. (Compl. Ex. B. [“THIS RESTATED LEASE AGREEMENT ("Lease'') is
entered into as of this June 2, 2023, and amends a Lease Agreement entered into
by the parties on March 15, 2023 (the “Effective Date”'), by and between 819 S.
Flower, LP, a California Limited Partnership (“Landlord”), and LUXURBAN RE
HOLDINGS LLC, a Delaware Corporation.”].)
In opposition, Plaintiff argues that
LuxUrban, Inc. was a party to the breach of guaranty and, thus, is liable on
the fifth cause of action for the breach of guaranty.
Plaintiff’s argument implicitly
concedes that the second cause of action against Defendant LuxUrban, Inc. is not
well taken. The second and fifth causes of action are two separate claims.
The
demurrer to the second cause of action is sustained without leave to amend as
to Defendant LuxUrban, Inc.
Fourth Cause of
Action for Ejectment:
“The
essential elements of an ejectment action are (1) the plaintiff's valid
interest in the property and (2) the defendant's wrongful possession and
withholding thereof.” (2710 Sutter Ventures, LLC v. Millis (2022) 82
Cal.App.5th 842, 866.)
As argued in the opposition, Plaintiff’s ejectment cause of action relies on the rescission of the Original
Lease and the Restatement. Because the rescission claim, pleaded in the first
cause of action, fails, the Complaint fails to allege facts showing Defendants’
wrongful possession.
Further, in reply, Defendants note
that Plaintiff has now filed an unlawful detainer complaint (the “UD
Complaint”) entitled 819 S. Flower, LLP v. Luxurban Re Holdings, LLC,
Case No. 23STCV30524. (Reply, RJN Ex. A.) Thus, separately, this other pending
action raises the question of whether a demurrer pursuant to Code of Civil Procedure
section 430.10, subdivision (c), is well taken. (Code Civ. Proc., § 430.10; Bush v. Superior Court (1992) 10
Cal.App.4th 1374, 1384 [explaining that a demurrer should be sustained where there
is another pending action involving the same parties in the same relationship and
involving identical causes of action in both suits such that a judgment in the
first would be res judicata on the claim in the second].)
The demurrer to the fourth cause of
action is sustained with leave to amend.
Third Cause of
Action for Declaratory Relief:
Defendants demur to this cause of action
on the grounds that Plaintiff fails to state a claim.
The language
of Code of Civil Procedure section 1060 allows for an extremely broad scope of
an action for declaratory relief:
“Any person interested under a
written instrument ... or under a contract, or who desires a declaration of his
or her rights or duties with respect to another, or in respect to, in, over or
upon property ... may, in cases of actual controversy relating to the legal
rights and duties of the respective parties, bring an original action or
cross-complaint in the superior court for a declaration of his or her rights
and duties in the premises, including a determination of any question of
construction or validity arising under the instrument or contract. He or she
may ask for a declaration of rights or duties, either alone or with other
relief; and the court may make a binding declaration of these rights or duties,
whether or not further relief is or could be claimed at the time....’”
(Otay Land Co. v. Royal Indem. Co. (2008)
169 Cal.App.4th 556, 562.) “[Q]uestions relating to the formation of a
contract, its validity, its construction and effect, excuses for
nonperformance, and termination are proper subjects for declaratory relief.” (Fowler v. Ross (1983) 142 Cal.App.3d
472, 478.)
At the pleading stage, Plaintiff has
properly stated a claim for declaratory relief. (Compl., ¶ 38-41.) The demurrer
to the third cause of action is overruled.
Conclusion
The demurrer
is sustained with leave to amend as to the first and fourth causes of action, sustained
without leave to amend as to the second cause of action against Defendant LuxUrban, Inc. only, and
overruled as to the third cause of action.
Plaintiff shall have leave to amend.
The first amended complaint shall be served and filed on or before March 4, 2024.