Judge: John J. Kralik, Case: 23BBCV00894, Date: 2023-09-29 Tentative Ruling
Case Number: 23BBCV00894 Hearing Date: February 16, 2024 Dept: NCB
North Central District
POWDERED JELLY DONUT INVESTMENTS, LLC, et al., Plaintiffs, v.
FLAMINGO HEIGHTS DEVELOPMENT, LLC, et al., Defendants.
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Case No.: 23BBCV00894
Hearing Date: February 16, 2024 [TENTATIVE] ORDER RE: DEMURRER; MOTION TO STRIKE |
BACKGROUND
A. Allegations
Plaintiffs Barron De Sanctis and Hrag Julian Karlubian (“Individual Plaintiffs”) allege that on March 29, 2021, they (as buyers) and Defendant Flamingo Heights Development, LLC (“Flamingo,” seller) entered into the Real Estate Purchase Agreement and Seller Counter Offer No. 1 (“Purchase Agreement”) for $800,000 regarding the property located at 60325 Canterbury St., Joshua Tree, CA 92252. On April 8, 2021, Plaintiffs issued a Request for Repair No. 1 to Defendants to reduce the purchase price to $780,000 after the inspection reports indicated that additional repairs were necessary (“Reduced Purchase Agreement”). Plaintiffs allege that Flamingo accepted the Purchase Agreement and was required to provide an accurate Transfer Disclosure Statement (“TDS”) and Seller Property Questionnaire (“SPQ”), but Flamingo failed to disclose that 2 bedrooms and 1 bathroom did not have proper permits. Plaintiffs allege that Defendants led them to believe that the property was properly remodeled by Flamingo with permits, but the TDS only noted that the laundry room was unpermitted. Plaintiffs allege that Defendants knew or should have known that the bedrooms and restroom were not permitted because the MLS “private note” that Defendants had access to indicated there were potential permitting problems and sellers Flamingo and Defendant Stephan Kazanchian (owner and operator of Flamingo) had obtained a Short Term Rental (“STR”) license based on 2 bed and 1 bath (as opposed to 4 bed and 2 bath), which was not discovered by Plaintiffs until they attempted to renew the license. Plaintiffs allege that in March and April 2021, Defendants represented that the property was ready and could be legally leased as an Airbnb and used as an investment property. Plaintiffs also allege that Defendants led Plaintiffs to believe the property was lawfully rented out as a 4-bed/2-bath short-term rental in compliance with the County of San Bernardino’s STR Ordinance.
Plaintiffs allege they agreed upon the purchase price on April 19, 2021, closed escrow, and took title and ownership of the property under Plaintiff Powdered Jelly Donut Investments, LLC (“Powdered”), which is alleged to be the transferee of the property (as the third-party beneficiary). They allege that they sought an STR permit from the County in early 2022, but the County denied the request on October 1, 2022 because 2 bedrooms and 1 bathroom were unpermitted.
Plaintiffs Lee S. Akin, Jr. (“Akin”) and National One Mortgage Corporation (dba National Realty Group) (“NRG”) are alleged to be the buyer’s agent/broker. Defendants Madelaine Dawn LaVoie (dba Cherie Miller & Associates) (“Madelaine LaVoie”) and Lynee Lissa LaVoie (“Lynee LaVoie”) are alleged to be the seller’s agent/broker.
The first amended complaint (“FAC”), filed October 19, 2023, alleges causes of action for: (1) breach of contract; (2) fraud – concealment; (3) fraud – intentional misrepresentation; (4) fraud – negligent misrepresentation; (5) intentional interference with prospective economic relations; (6) negligent interference with prospective economic relations; (7) negligence; (8) breach of fiduciary duty; (9) professional negligence; (10) constructive fraud; (11) negligent misrepresentation; and (12) unfair competition law (Business & Professions Code, § 17200). The 1st cause of action is alleged against Flamingo and Kazanchian. The 2nd, 3rd, 4th, and 7th causes of action are alleged against Flamingo, Kazanchian, Madelaine LaVoie, CM&A, and Lynee LaVoie. The 5th, 6th, and 12th causes of action are alleged against all Defendants. The 8th to 11th causes of action are alleged against Akin and NRG.
B. Cross-Complaint
On May 31, 2023, Cross-Complainants Madelaine Dawn La Voie dba Cherie Miller & Associates and Lynee Lissa La Voie filed a cross-complaint against Roes 1-50 for: (1) equitable indemnity; (2) contribution; and (3) declaratory relief.
C. Demurrer on Calendar
On December 12, 2023, Defendants NRG and Akin filed a demurrer to the FAC.
On February 5, 2024, Plaintiffs filed an opposition brief.
On February 8, 2024, Defendants filed a reply brief.
DISCUSSION
Defendants NRG and Akin demur to the 5th, 6th, 8th, 9th, 10th, 11th, and 12th causes of action in the FAC.
A. 5th and 6th causes of action for Intentional and Negligent Interference with Prospective Economic Advantage
The elements of the tort of intentional interference with prospective economic advantage are: “(1) an economic relationship between the plaintiff and some third party, with the probability of future economic benefit to the plaintiff; (2) the defendant's knowledge of the relationship; (3) intentional acts on the part of the defendant designed to disrupt the relationship; (4) actual disruption of the relationship; and (5) economic harm to the plaintiff proximately caused by the acts of the defendant.” (Korea Supply Co. v. Lockheed Martin Corp. (2003) 29 Cal.4th 1134, 1153.) “In addition, the plaintiff must allege that the defendant's conduct was wrongful by some measure beyond the fact of the interference itself. [Citation.] In this context, an act is independently wrongful if it is unlawful, that is, if it is proscribed by some constitutional, statutory, regulatory, common law, or other determinable legal standard. [Citation.] The conduct must be independently actionable. The act of interference with prospective economic advantage is not tortious in and of itself, but requires pleading that a defendant has engaged in an act that was independently wrongful in order to distinguish lawful competitive behavior from tortious interference.” (Stevenson Real Estate Services, Inc. v. CB Richard Ellis Real Estate Services, Inc. (2006) 138 Cal.App.4th 1215, 1220 [internal quotation marks and citations omitted].)
“The tort of negligent interference with prospective economic advantage is established where a plaintiff demonstrates that (1) an economic relationship existed between the plaintiff and a third party which contained a reasonably probable future economic benefit or advantage to plaintiff; (2) the defendant knew of the existence of the relationship and was aware or should have been aware that if it did not act with due care its actions would interfere with this relationship and cause plaintiff to lose in whole or in part the probable future economic benefit or advantage of the relationship; (3) the defendant was negligent; and (4) such negligence caused damage to plaintiff in that the relationship was actually interfered with or disrupted and plaintiff lost in whole or in part the economic benefits or advantage reasonably expected from the relationship.” (Venhaus v. Shultz (2007) 155 Cal.App.4th 1072, 1078.)
In the 5th and 6th causes of action, Plaintiffs allege that Plaintiffs and Airbnb (along with its guests) were in an economic relationship that would have resulted in an economic benefit to Plaintiffs, and Defendants knew of this relationship as Plaintiffs intended to use the property as an investment property. (FAC, ¶¶66-67, 73-74.) Plaintiffs allege that Defendants engaged in fraudulent misrepresentations and concealments of fact regarding the property not being fully permitted and thus not legally operable as a short-term rental property. (Id., ¶68.) Plaintiffs allege by engaging in this conduct, Defendants intended to disrupt or knew that disruption of the relationship was substantially certain to occur. (Id., ¶69.) They allege the relationship was disrupted such that Plaintiffs are unable to continue to lease the property through Airbnb. (Id., ¶¶70, 75.)
NRG and Akin argue that these causes of action fail to allege sufficient facts because Plaintiffs have not alleged that they had an existing economic relationship with a third party but only that they “desired” to have such a relationship and that obtaining a permit was a prerequisite. The FAC alleges that Flamingo had shown rental income proof of the property as an Airbnb rental before Plaintiff’s purchase (FAC, ¶31) and that the property was not fully permitted, making it unfit to be legally leased as an Airbnb pursuant to San Bernardino County ordinances (id., ¶55). The 5th and 6th causes of action allege that Plaintiffs and Airbnb (along with Airbnb guests) were in an economic relationship that probably would have resulted in an economic benefit to Plaintiff. (Id., ¶¶66, 73.) NRG and Akin argue that the allegations are inconsistent because Plaintiffs allege in one part that the property was unfit to be used as an Airbnb rental, while also alleging that Plaintiffs had an agreement with Airbnb to rent the premises.
However, the allegations of the 5th and 6th causes of action, taken as true, allege that they were in fact in an economic relationship with Airbnb and its guests. It may be that Plaintiffs were in an economic relationship with Airbnb, but they were ultimately unable to lease the premises as the property was not properly permitted, which would cause a disruption in the economic relationship. At this time, the Court will accept the allegations as true. (Bush v. California Conservation Corps (1982) 136 Cal.App.3d 194, 198 [stating that on demurrer, all material facts properly pleaded and all reasonable inferences which can be drawn therefrom are deemed admitted].)
NRG and Akin argue that they did not know of any relationship between Plaintiffs and Airbnb because none existed. However, Defendants’ arguments rely on extrinsic facts outside of the pleadings. At this time, the FAC alleges that an economic relationship existed and the Court will take these allegations as true. Whether this fact can be proven will have to be determined beyond the pleading stage upon the consideration of evidence.
The demurrer to the 5th and 6th causes of action in the complaint was previously overruled on these same grounds. The demurrer to the 5th and 6th cause of action alleged in the FAC is overruled.
B. 8th cause of action for Breach of Fiduciary Duty
To state a cause of action for breach of fiduciary duty, the Plaintiff must allege the following: (1) the existence of a fiduciary relationship; (2) its breach; and (3) damage proximately caused by that breach. (Roberts v. Lomanto (2003) 112 Cal. App. 4th 1553, 1562.)
Civil Code, § 2079(a) states: “(a) It is the duty of a real estate broker or salesperson, licensed under Division 4 (commencing with Section 10000) of the Business and Professions Code, to a prospective buyer of residential real property improved with one to four dwelling units or a manufactured home as defined in Section 18007 of the Health and Safety Code, to conduct a reasonably competent and diligent visual inspection of the property offered for sale and to disclose to that prospective buyer all facts materially affecting the value or desirability of the property that an investigation would reveal, if that broker has a written contract with the seller to find or obtain a buyer or is a broker who acts in cooperation with that broker to find and obtain a buyer.” Civil Code, § 2079.3 states: “The inspection to be performed pursuant to this article does not include or involve an inspection of areas that are reasonably and normally inaccessible to this type of an inspection, nor an affirmative inspection of areas off the site of the subject property or public records or permits concerning the title or use of the property ….”
Defendants National One and Akin demur to the 8th to 12th causes of action, arguing that they did not have a fiduciary duty to discover the lack of permits because there was no demonstration of a need for them to inquire further.
In the 8th cause of action, Plaintiffs allege that NRG and Akin were Plaintiffs’ real estate agents/brokers and had a fiduciary relationship, such that they acted on Plaintiffs’ behalf for purchasing the residential property for Airbnb purposes. (FAC, ¶¶88-89.) Plaintiffs allege that Akin and NRG failed to act as reasonably careful real estate agents/brokers would have acted under the same or similar circumstances, such that they breached their duties to Plaintiffs. (Id., ¶90.)
In the general allegations, Plaintiffs allege that on March 29, 2023, they asked NRG and Akin regarding which parts of the property (if any) were unpermitted and Akin represented that only the laundry was added without permits and that everything else was properly permitted or did not require a permit. (FAC, ¶22.) Plaintiffs allege that Akin was specifically asked by his principal such that he had a duty of care to ensure that the information he provided in response to that question was accurate and truthful. (Id., ¶24.) Plaintiffs also allege that Akin and NRG as fiduciaries had duties to learn material facts that would have affected Plaintiffs’ decision to purchase the property and that Akin/NRG failed to meet this standard. (Id., ¶25.) They allege that Akin and NRG had a duty to furnish material information to Plaintiffs, particularity since Plaintiffs specifically asked about the issue with permitting as Akin and NRG knew that Plaintiffs were intending to utilize the property as a STR. (Id., ¶26.)
NRG and Akin argue that the 8th cause of action fails because Plaintiffs only allege that NRG and Akin owed a fiduciary duty to discover the lack of permits, but they do not allege any facts that would give rise to requiring that NRG and Akin go beyond section 2079.3 inspection duties by inspecting public records/permits and make disclosures. In opposition, Plaintiffs argue that Plaintiff and NRG/Akin had a principal and agent relationship that constituted a fiduciary relationship and that this is sufficient to satisfy the elements for the 8thcause of action. Plaintiffs cite to paragraphs 16 to 38, arguing that they have sufficiently alleged how the fiduciary duty was breached.
In the demurrer to the initial complaint, the Court had found that the general allegations were generally made against all Defendants and mostly against Flamingo for its failure to obtain the proper permits. Upon amendment, Plaintiffs have now alleged facts specifically about Akin and NRG’s conduct—that Plaintiffs had informed NRG/Akin of their intent to use the property as an investment property and that they had specifically asked about permitting issues. At this time, the Court finds that the allegations sufficiently allege a fiduciary duty, including a duty to inspect the permit records.
The demurrer to the 8th cause of action is overruled.
C. 9th cause of action for Professional Negligence
In the 9th cause of action, Plaintiffs allege that these Akin and NRG had a fiduciary relationship with Plaintiffs. (FAC, ¶93.) They allege that Akin and NRG owed the highest duty of good faith and fair dealing and a duty to proceed with reasonable care with regard to Plaintiffs as Akin/NRG acted on Plaintiffs’ behalf for the purpose of purchasing property. (Id., ¶94.) Plaintiffs allege that Akin and NRG failed to act as reasonably careful real estate brokers/agents, which caused Plaintiffs’ harm. (Id.) Specifically, Plaintiffs allege that NRG and Akin were asked about permitting on the subject property, and that NRG and Akin owed Plaintiffs a fiduciary duty to learn about all material facts that may affect Plaintiffs’ decision to purchase the property. (Id., ¶95.)
Plaintiffs argue that the elements of a professional negligence claim are: “(1) the duty of the professional to use such skill, prudence, and diligence as other members of his profession commonly possess and exercise; (2) a breach of that duty; (3) a proximate causal connection between the negligent conduct and the resulting injury; and (4) actual loss or damage resulting from the professional's negligence.” (Osornio v. Weingarten (2004) 124 Cal.App.4th 304, 319 [legal malpractice claim].)
The only duty alleged here is a fiduciary duty. It is unclear how this cause of action is any different from the breach of fiduciary duty cause of action, which is premised upon the special relationship between the parties as buyers and agents/brokers. While this cause of action appears to be duplicative of the 8th cause of action, the Court will allow this cause of action to proceed as an alternate theory to the breach of fiduciary duty cause of action.
Accordingly, the demurrer to the 9th cause of action is overruled.
D. 10th and 11th causes of action for Constructive Fraud and Negligent Misrepresentation
To allege a cause of action for fraud, the requisite elements are: (1) a representation, usually of fact, which is false; (2) knowledge of its falsity; (3) intent to defraud; (4) justifiable reliance upon the misrepresentation; and (5) damage resulting from that justifiable reliance. (Stansfield v. Starkey (1990) 220 Cal. App. 3d 59, 72-73.) To allege a cause of action for negligent misrepresentation, the requisite elements are: (1) a misrepresentation of a past or existing material fact; (2) without reasonable grounds for believing it to be true; (3) with intent to induce another's reliance on the fact misrepresented; (4) ignorance of the truth and justifiable reliance thereon by the party to whom the misrepresentation was directed; and (5) damages. (B.L.M. v. Sabo & Deitsch (1997) 55 Cal. App. 4th 823, 834.) Negligent misrepresentation, unlike fraud, does not require knowledge of falsity. (Apollo Capital Fund, LLC v. Roth Capital Partners, LLC (2007) 158 Cal.App.4th 226, 243.) The elements for fraudulent concealment are the following: (1) the defendant must have concealed or suppressed a material fact; (2) the defendant must have been under a duty to disclose the fact to the plaintiff; (3) the defendant must have intentionally concealed or suppressed the fact with the intent to defraud the plaintiff; (4) the plaintiff must have been unaware of the fact and would not have acted as he did if he had known of the concealed or suppressed fact; and (5) as a result of the concealment or suppression of the fact, the plaintiff must have sustained damage. (Lovejoy v. AT&T Corp. (2004) 119 Cal. App. 4th 151, 157-158.)
These causes of action are torts of deceit and the facts constituting each element must be alleged with particularity; the claims cannot be saved by referring to the policy favoring liberal construction of pleadings. (Committee on Children's Television, Inc. v. General Foods Corp. (1983) 35 Cal.3d 197, 216.) Since the claims must be pleaded with particularity, the causes of action based on misrepresentations must allege facts showing how, when, where, to whom, and by what means the misrepresentations were tendered. (Stansfield v. Starkey (1990) 220 Cal.App.3d 59, 73.)
The Court of Appeal in Salahutdin v. Valley of California, Inc. (1994) 24 Cal.App.4th 555 discussed constructive fraud as follows:
“In addition to the traditional liability for intentional or actual fraud, a fiduciary is liable to his principal for constructive fraud even though his conduct is not actually fraudulent. Constructive fraud is a unique species of fraud applicable only to a fiduciary or confidential relationship.” (2 Miller & Starr, Cal. Real Estate (2d ed. 1989) Agency, § 3:20, p. 119, fn. omitted.)
“[A]s a general principle constructive fraud comprises any act, omission or concealment involving a breach of legal or equitable duty, trust or confidence which results in damage to another even though the conduct is not otherwise fraudulent. Most acts by an agent in breach of his fiduciary duties constitute constructive fraud. The failure of the fiduciary to disclose a material fact to his principal which might affect the fiduciary's motives or the principal's decision, which is known (or should be known) to the fiduciary, may constitute constructive fraud. Also, a careless misstatement may constitute constructive fraud even though there is no fraudulent intent.” (2 Miller & Starr, supra, Agency, § 3:20 at pp. 120-121, fns. omitted.)
“A broker who is merely an innocent conduit of the seller's fraud may be innocent of actual fraud [citations], but in this situation the broker may be liable for negligence on a constructive fraud theory if he or she passes on the misstatements as true without personally investigating them. [Citations.]” (Cal. Real Property Remedies Practice (Cont.Ed.Bar 1982) § 3.36, p. 88.)
“[T]he broker has a fiduciary duty to investigate the material facts of the transaction, and he cannot accept information received from others as being true, and transmit it to the principal, without either verifying the information or disclosing to the principal that the information has not been verified. Because of the fiduciary obligations of the broker, the principal has a right to rely on the statements of the broker, and if the information is transmitted by the broker without verification and without qualification, the broker is liable to the principal for negligent misrepresentation.” (2 Miller & Starr, supra, § 3.17, pp. 97-98, fns. omitted.)
(Salahutdin v. Valley of California, Inc. (1994) 24 Cal.App.4th 555, 562–563.)
In the 10th cause of action, Plaintiffs allege that Akin and NRG owed the highest duties of good faith and fair dealing to Plaintiffs and that they breached their fiduciary duties to Plaintiffs by engaging in constructive fraud by: failing to properly provide advice to Plaintiffs, failing to independently verify information provided by the sellers’ agents, failing to inspect records for permits, failing to provide accurate information about permitting, providing inaccurate information in response to Plaintiffs’ questions, and failing to investigate to advertisements about permitting on the property. (FAC, ¶¶100-101.) Plaintiffs allege they relied on Akin and NRG’s representations about permitting and this reliance was reasonable because Akin and NRG held themselves out to be licensed and experienced fiduciaries. (Id., ¶¶102-103.)
Akin and NRG argue that the constructive fraud cause of action fails to allege any facts regarding Akin and NRG’s intent to deceive Plaintiffs. However, as discussed above, intent is not a necessary requirement for constructive fraud, which is s subspecies of fraud applicable in fiduciary relationships.
As such, the demurrer to the 10th cause of action is overruled.
E. 11th cause of action for Negligent Misrepresentation
To allege a cause of action for negligent misrepresentation, the requisite elements are: (1) a misrepresentation of a past or existing material fact; (2) without reasonable grounds for believing it to be true; (3) with intent to induce another's reliance on the fact misrepresented; (4) ignorance of the truth and justifiable reliance thereon by the party to whom the misrepresentation was directed; and (5) damages. (B.L.M. v. Sabo & Deitsch (1997) 55 Cal. App. 4th 823, 834.) Negligent misrepresentation, unlike fraud, does not require knowledge of falsity. (Apollo Capital Fund, LLC v. Roth Capital Partners, LLC (2007) 158 Cal.App.4th 226, 243.) This cause of action is a tort of deceit and the facts constituting each element must be alleged with particularity; the claim cannot be saved by referring to the policy favoring liberal construction of pleadings. (Committee on Children's Television, Inc. v. General Foods Corp. (1983) 35 Cal.3d 197, 216.) Since the claim must be pleaded with particularity, the cause of action based on misrepresentations must allege facts showing how, when, where, to whom, and by what means the misrepresentations were tendered. (Stansfield v. Starkey (1990) 220 Cal.App.3d 59, 73.)
In the 11th cause of action, Plaintiffs allege that they specifically asked Akin about permitting, but Akin/NRG made misstatements of fact to Plaintiffs without reasonable ground for believing the misstatements and without investigation. (FAC, ¶¶107-108.) Plaintiffs allege that due to Akin and NRG’s duties of honesty, competence, and diligence as agents/brokers, Plaintiffs had the right to rely on the statements. (Id., ¶109.) Plaintiffs allege that the information transmitted by Akin and NRG to Plaintiffs were without verification and qualification. (Id., ¶110.)
Akin and NRG argue that the allegations lack facts showing that they should have known that the representations regarding the permits were false. Defendants argue that the FAC shows that they asked permitting issues from the sellers and the sellers disclosed permitting issues with the laundry room, but did not make any statements about the 2 bedrooms and 1 bathroom. However, as stated above, negligent misrepresentation does not require knowledge of falsity like an ordinary fraud cause of action. As such, the demurrer to the 11th cause of action is overruled.
F. 12th cause of action for unfair competition law (violation of Business & Professions Code, § 17200)
In the 12th cause of action, Plaintiffs allege that Defendants jointly acted unlawfully by failing to disclose information, failing to act with reasonable care, fraudulently concealing information, making intentional and fraudulent statements, or such similar conduct to cause Plaintiffs to purchase the property without disclosing that the property had 2 unpermitted bedrooms and 1 unpermitted restroom. (FAC, ¶114.) Plaintiffs allege that Defendants violated Civil Code, §§ 1102 et seq. (re disclosures upon transfer), 1573 (constructive fraud), 2079, and 2079.2 (real estate broker standard of care). (Id., ¶115.)
National One and Akin demur to the 9th cause of action, arguing that it is dependent on the prior causes of action and therefore should be sustained for the reasons discussed in their demurrer papers.
For the reasons discussed above, the demurrer to the 12th cause of action is overruled.
CONCLUSION AND ORDER
Defendants National One Mortgage Corporation and Lee Akin Jr.’s demurrer to the complaint is overruled. Defendants are ordered to answer.