Judge: Mark H. Epstein, Case: 22SMCV01852, Date: 2023-05-26 Tentative Ruling
Case Number: 22SMCV01852 Hearing Date: May 26, 2023 Dept: R
Plaintiffs CMB Export
Infrastructure Investment Group 48, LP (CMB), and Texas 3 Bobs, LP (T3B, and,
collectively “plaintiffs”) filed this action against defendants Motcomb
Estates, Ltd. (Motcomb), Reuben Brothers, Ltd. (Reuben or Reuben Brothers),
First American Title Insurance Company, and Next Century Partners, LLC (NCP)
over how loans on a construction project were handled. According to the operative complaint,
defendant Next Century Partners is the developer of a project that aimed to
redevelop the iconic Century Plaza Hotel together with the construction of two
condominium towers. (Compl., ¶47.) In 2016, NCP secured $1.016 billion in
private construction financing for the project.
(Id. at ¶55.) Plaintiffs
allege that the senior construction loan of $446 million was from JP Morgan,
the senior mezzanine financing of $120 million from CDCF IV, and $450 million
in junior mezzanine financing from plaintiff CMB. (Ibid.) Various agreements between the lenders and
NCP’s affiliates (as borrower) memorialized these loans. (Id. at ¶¶56-58.) The borrower on plaintiff CMB’s loan is CPMB,
an indirect 100% owner of NCP and the project, and repayment on this loan is
partly secured by pledge of 100% control and ownership in CPMB. (Id. at ¶60.) CMB’s loan is junior to the senior mezzanine
loan; the borrower of that loan is NCPMB.
(Ibid.) And both Mezzanine
loans are subordinate to the senior loan.
Today’s hearing concerns a demurrer filed by Reuben Brothers and Motcomb
as well as a preliminary injunction hearing.
The latter is largely moot, as the foreclosure sale has occurred. Thus, the bulk of the discussion below
pertains to the demurrer. For purposes
of the demurrer (and unlike a preliminary injunction), the court looks only to
the complaint and matters of which the court can take judicial notice. That includes the various agreements referred
to and central to the complaint. Because
the preliminary injunction is largely moot, the discussion below focuses on the
complaint and not on any of the additional evidence submitted as part of the PI
papers.
Plaintiffs claim that JP
Morgan, as the administrative agent for the senior and senior mezzanine loans,
and CMB entered into an Intercreditor Agreement on July 5, 2016 to define the
rights and obligations amongst the lenders.
(Compl., ¶61.) Plaintiffs assert that the agreement provides that the
senior and senior mezzanine lenders were prohibited from entering into
modifications of their loans that would materially increase the monetary
obligations of the senior loan borrower (NCP) or senior mezzanine loan borrower
(NCPMB) without CMB’s prior written consent.
(Id. at ¶62.) Plaintiffs
state the Intercreditor Agreement has been amended four times, most recently in
September 2020. (Id. at
¶63.) The first three amendments
concerned CMB’s consent to increases in the senior or senior mezzanine
loans. (Id. at ¶¶64-71.)
Plaintiffs state that in
March 2020, the same month that the COVID shutdowns began, JP Morgan declared
the senior loan out of balance, and even though approximately $216 million of
the senior loan remained to be spent, JP Morgan questioned whether NCP’s
combined sources of capital would be enough to complete the project. (Compl., ¶72.) Consequently, NCP was forced to look for
additional funding in 2020 to complete the project. (Id. at ¶73.) Plaintiffs allege that on September 1, 2020,
the senior mezzanine lenders, including defendant Reuben Bros. (which was being
added to the lender roster) and NCPMB, as the senior mezzanine borrower,
entered into an amended security agreement that increased the maximum principal
amount of the senior mezzanine loan. (Id.
at ¶74.) Prior to that amendment, CDCF
and NCP informed CMB that Reuben had agreed to fund an increase in the senior
mezzanine loan in the amount of $275,000,000 and its affiliate, Motcomb, would
be the new senior mezzanine agent. (Id.
at ¶75.)
Plaintiffs claim that
before the parties entered into that agreement, CMB offered to assist in the
additional funding through CMB or an affiliate, and that loan would be repaid
prior to the senior mezzanine loan.
(Compl., ¶76.) CDCF allegedly
refused because it did not want CMB to leapfrog in terms of priority. (Ibid.)
On September 1, 2020, JP
Morgan, Motcomb, and CMB entered into the Fourth Amendment of the Intercreditor
Agreement to memorialize plaintiff’s consent to the increased maximum principal
amount of the senior mezzanine loan.
(Compl., ¶78.) Plaintiffs claim
that “To induce CMB to sign the Fourth Amendment to Intercreditor Agreement,
Reuben Bros. and Motcomb fraudulently misrepresented to CMB that all of Reuben
Bros.’ $275,000,000 ‘tranche’ (with the
exception of certain amounts used to pay down Senior Loan debt owed to JP
Morgan) would actually be made available to NCPMB and Next Century to complete
the Project work. This misrepresentation
was contained in the Third Amended and Restated Senior Mezzanine Loan Agreement
and Exhibit H thereto, which were finalized and incorporated into the Fourth
Amendment to Intercreditor Agreement.” (Id.
at ¶79.) Plaintiffs contend that Reuben,
Motcomb, and CDCF did not inform CMB that as of September 1, 2020, they had or
were about to enter into a series of agreements that would eventually wind up
extinguishing CMB’s junior mezzanine loan interest. (Id. at ¶81.) Plaintiffs assert that CMB would not have
entered into the Fourth Amendment or consented to the increase in the senior
mezzanine loan amount had it known of Reuben’s intent. (Id. at ¶82.)
Plaintiffs claim that with
the Reuben’s additional $275 million tranche on top of the senior mezzanine loan
and the existing $216 million remaining on the loan commitment of the senior
loan, there were adequate funds to finish construction without the need for protective
advances. (Compl., ¶¶85-86.) (A protective advance is an advance that the
lender makes voluntarily to protect the project, usually after the loan is in
default or there is some other reason why a normal advance would not be made;
it typically is more expensive than a regular advance on the loan.) However, Reuben purportedly made less than $200
million of its commitment available to the borrowers to help them overcome
pandemic-related setbacks. (Id.
at ¶87.) Plaintiffs claim that $75
million was used to pay down senior loan amounts but less than $125 million was
made available to pay for construction costs before the “arbitrarily short
maturity date of July 9, 2021.” (Id.
at ¶88.) (While that date may be
arbitrary, it is the maturity date that is in the loan documents; plaintiffs
were aware of that date when they signed the fourth amendment to the
Intercreditor Agreement.) Plaintiffs
allege that Reuben engineered its participation in the loans so it could
quickly force the project to take on Protective Advances at a 20% annual rate
on top of default rate of interest, instead of the full amount of the senior
mezzanine loan. (Id. at
¶89.) Plaintiffs assert that the scheme
is obvious when taking into consideration that only one year after the maturity
date, Reuben had already charged NCPMB and the project $269,807,671.08 in
interest and fees on the project. (Id.
at ¶¶90-91.)
Plaintiffs contend that on
September 1, 2020, Motcomb, Reuben, and CDCF entered into a secret
“Participation Agreement” that gave Reuben’s interest in the senior mezzanine
loan priority over CDCF’s loan. (Compl.,
¶93.) Reuben and CDCF allegedly agreed
that if there was a default of the senior mezzanine loan, Reuben would seize
indirect 100 percent control of the project and its profits. (Ibid.) Plaintiffs allege that the Participation
Agreement further prohibited CDCF from assigning its interest in the senior
mezzanine loan to CMB without Reuben and Motcomb’s consent. (Id. at ¶94.) “The Participation Agreement also purportedly
allowed Reuben Bros. to charge CDCF IV interest in the amount of 30% per annum
on Protective Advances that CDCF IV did not fund to the Project under the
Senior Mezzanine Loan (in addition to the 20% per annum being charged to NCPMB
for Protective Advances under the Senior Mezzanine Loan documents). [¶] This provision in the Participation
Agreement, if enforced, would further prevent CMB from exercising its lawful
right under the Intercreditor Agreement to protect its Junior Mezzanine Loan
position by buying CDCF IV’s participation interest in the Senior Mezzanine
Loan.” (Id. at ¶¶95-96.)
On July 12, 2021, JP
Morgan informed CMB of a “Purchase Option Event” under the Intercreditor
Agreement due to NCP’s failure to repay the senior loan prior to the loan
maturity date. (Compl., ¶97.) The Intercreditor Agreement gives CMB a one-time
right to purchase the senior loan, in whole but not in part, after notification
of a Purchase Option Event. (Id.
at ¶98.) The definition of a Purchase
Option Event was first made in the original Intercreditor Agreement but the
Fourth Amendment expanded the definition to include NCP’s failure to repay the
loan on the maturity date. (Id.
at ¶¶99-100.) On October 15, 2021, CMB
learned that JP Morgan’s duties as the senior agent had been reassigned to
Motcomb as part of a transaction in which Reuben purchased all or part of the
senior loan. (Id. at ¶101.) Plaintiffs insist that any senior lender
acting in good faith would have extended the initial maturity date due to the
various issues that plagued the project, including COVID and current numbers,
especially given that the project was well underway and nearing
completion. (Id. at ¶102.) However, Reuben purportedly obtained its
interests in the senior and senior mezzanine loans with the intent to refuse to
extend the July 1, 2021 loan maturity date even though doing so was
commercially unreasonable. (Id.,
at ¶104.) Plaintiffs contend that “the
total combined amount due under the Senior Loan and Senior Mezzanine Loan as of
July 9, 2022 was $2,226,082,594[.]” (Id.
at ¶105.) Reuben’s alleged actions of
requiring Protective Advances was purportedly part of its plan to make the
borrowers’ repayment of the junior mezzanine loan an impossibility and
therefore to be able to extinguish everyone’s interest in the project but their
own. (Id. at ¶109.)
Preliminary Injunction
According to defendants,
the preliminary injunction motion is moot because mortgage foreclosure sale
occurred on or about April 6. Reuben (or
an entity Reuben controls) placed a successful credit bid of $1,014,560,000 for
the collateral consisting of the hotel, retail properties, and certain condo
units. The remaining 197 condo units are
still owned by Next Century. Defendants
also entered into a forbearance agreement with Next Century. (Next Century states that, as a result of the
foreclosure, it ought to be dismissed from the action. However, that request was stated in its CMC
statement; that does not a proper motion make.)
Plaintiffs argue in their own supplemental brief that defendants misled
the court about the needed urgency for the foreclosure sale, and the court was initially
quite concerned. Reuben pressed very
hard for the TRO not to extend long enough to stop a sale before April 1, 2023
because on that date a new law was taking effect imposing a 5.5% transfer tax
on property transfers in excess of $10 million.
Reuben wanted to avoid that tax by having the foreclosure sale completed
no later than March 31, 2023. (There is
considerable doubt about this tax. It is
being challenged in court and the outcome is uncertain. Further, traditionally transfer taxes do not
apply to amounts paid by the lender in a credit bid up to the amount of the
debt. If that rule applies here, Reuben’s
additional transfer tax liability would be little or nothing. However, it is not clear that this will apply
to the new law.) The court went to great
lengths to hold the PI hearing before the end of March to accommodate
Reuben. Ultimately, the court held the
hearing and issued the PI, but set a high bond that CMB was unable to
post. That said, though, the sale did
not go forward until early April. The
court was initially troubled because of Reuben’s urgent request that it be
allowed to complete the sale before April—yet it appeared that it elected not
to do so. However, Reuben explained the
problem. It was apparently ready to
complete the foreclosure sale on March 31, 2023, but that was Caesar Chavez day
and the sale could therefore not go forward.
Frankly, the fact that March 31, 2023 was a date that the sale could not
go forward was something that the court did not know, and apparently neither
did any of the parties. Because the
court had essentially barred the sale from going forward any sooner than that,
Reuben simply was unable to complete the sale in March. That was not a delay of Reuben’s making, and
the court’s concerns have been satisfied.
Because the sale has already occurred, the motion to enjoin it is
MOOT. However, as stated before, Reuben
voluntarily offered not to compromise the property without giving notice. By way of background, the urgency plaintiffs’
alleged to support an injunction where there was no irreparable injury (recall
that CMB is not an equity holder, it is a lender and T3B’s interest is remote)
was that Reuben is not an American entity and that plaintiffs would be unable
to collect on any judgment they ultimately obtained. Reuben argued that it did have an asset
locally—the hotel (at least if Reuben was the successful bidder). That asset is likely more than enough to
satisfy any judgment plaintiffs might obtain—especially since Reuben owns the
property essentially outright. The court
held the hearing but stated that it would hold Reuben to its promise. As a result of its voluntary undertaking, Reuben
(as well as its affiliates, including the successful bidder) are precluded from
selling, hypothecating, encumbering, or in any way impairing its interest in
the hotel without first giving plaintiffs at least 45 days’ notice. After 45 days, absent some order from the
court, Reuben is free to take such an action—this is a notice requirement, not
a general bar from taking action.
However, such notice will be required.
CMB is to provide an appropriate order after giving it to Reuben for approval
as to form.
Request for Judicial
Notice
Defendants request
judicial notice of the various Intercreditor Agreements and the Participation
Agreement. The contracts are discussed at length in the complaint but that
alone does not make the contracts themselves the proper subject of judicial
notice. A contract between private
parties is usually not subject to judicial notice. (Gould v. Maryland Sound
Industries, Inc. (1995) 31 Cal.App.4th 1137, 1145.) However, a court can take judicial notice of
a contract when there is no dispute regarding its authenticity and
enforceability. (Pastoria v.
Nationwide Ins. (2003) 112 Cal.App.4th 1490, 1495 fn. 4; see also Ascherman
v. Gen. Reinsurance Corp. (1986) 183 Cal.App.3d 307, 310-311; StorMedia
Inc. v. Superior Court (1999) 20 Cal.4th 449, 457, fn. 9.) Here, the court can consider the various
agreements referred to in the complaint and, given that there is no dispute as
to the words used therein, the court can consider the contract’s terms. What the court cannot do at this stage is
interpret the contracts unless they are clear and unambiguous and no parol
interpretation would change the result.
(There may be an interesting choice of law question one day as to
whether California or New York law applies regarding the parol evidence rule
given that the law in the two states is different, but that is not before the
court today.) Thus, the request for
judicial notice is GRANTED to the extent it seeks no more than the foregoing,
but is in other respects DENIED.
The court GRANTS
defendants’ request for judicial notice of the New York complaint by CDCF,
although (obviously) not of the truth of the allegations asserted therein, as
well as orders and court filings in that case.
The court does not take judicial notice of the truth of any assertions
of fact therein, but the court can, and does, take judicial notice of the fact
of the proceedings and the jural effect of any orders made. (Along those lines, Reuben seems to have
suggested that the Appellate Division of the New York Supreme Court has lifted
the injunction entered by the trial department.
The court does not have that order, and is unsure if the Appellate
Division’s determination was merits-based or mootness-based, or whether any
order issued at all. While not really
critical or even pertinent to the demurrer, the court is curious.)
With that, the court turns
to the merits.
Fraudulent Concealment
The demurrer to the
fraudulent concealment claim is OVERRULED.
“As noted, under Civil Code section 1710, subdivision (3), fraud may
consist of a suppression of a material fact in circumstances under which the
defendant has a legal duty of disclosure.
(See Lingsch v. Savage (1963) 213 Cal.App.2d 729, 735 [‘the
person charged with the concealment or nondisclosure of certain facts’ must be
found to be ‘under a legal duty to disclose them’].)” (Hoffman v. 162 North Wolfe LLC (2014)
228 Cal.App.4th 1178, 1186, parallel citations omitted.) There are typically four relationships where
concealment may constitute fraud: (1) where there is a fiduciary relationship
between the defendant and plaintiff; (2) where the defendant has exclusive
knowledge of material facts of which the plaintiff is unaware; (3) where the
defendant actively conceals material facts from the plaintiff; and (4) where
the defendant makes a partial representation but conceals material facts. (Ibid., citing LiMandri v. Judkins
(1997) 52 Cal.App.4th 326, 336.) Aside
from the first ground, the remaining ones presuppose the existence of a
relationship between the plaintiff and defendant where a duty to disclose would
arise. (Id. at p. 1187, citing LiMandri,
supra, 52 Cal.App.4th at p. 336-337.)
“A relationship between the parties is present if there is ‘some sort of
transaction between the parties.
[Citations.] Thus, a duty to
disclose may arise from the relationship between seller and buyer, employer and
prospective employee, doctor and patient, or parties entering into any kind of
contractual agreement.’ (LiMandri,
at p. 337, original italics, citing Warner Constr. Corp. v. City of Los
Angeles (1970) 2 Cal.3d 285, 294; see Use Note to CACI No. 1901 [indicating
that for concealment claim not based upon fiduciary relationship, ‘if the
defendant asserts that there was no relationship based on a transaction giving rise
to a duty to disclose, then the jury should also be instructed to determine
whether the requisite relationship existed’].)”
(Ibid.)
Defendants argue that
plaintiffs have not alleged any duty to disclose in light of the Participation
Agreement’s contractual language and CMB’s representations in the Intercreditor
Agreement. They further assert that the
Participation Agreement did not change the borrowers’ obligations. On the element of reliance, defendants claim
plaintiffs cannot allege they relied on the nondisclosure in light of the fact
they are sophisticated investors, the Intercreditor Agreements did not prevent
such agreements, and plaintiff T3B already earned its profit.
Most, if not all of
defendants’ arguments rely on the contracts and require the court to make reasonable
inferences about what plaintiffs would or would not have done had they known
certain facts. That is not the province
of a demurrer. Additionally, plaintiffs
have stated a claim for concealment where the defendants actively concealed
material facts from plaintiffs regarding how much of Reuben’s tranche would be
available for the borrower and Reuben, Motcomb, and CDCF’s intent to enter into
a series of side agreements that presented the possibility of wiping out CMB’s
junior mezzanine loan (and T3B’s profit interest). (Compl., ¶¶79-82.) The court must accept these assertions as
true at this juncture.
As for reliance, that is a
question of fact and the court cannot decide it now with the state of the
allegations as they are. “Justifiable
reliance is an essential element of a claim for fraudulent misrepresentation,
and the reasonableness of the reliance is ordinarily a question of fact. (Seeger v. Odell (1941) 18 Cal.2d 409,
414–415; Danzig v. Jack Grynberg & Associates, supra, 161 Cal.App.3d
at p. 1138.) However, whether a party's
reliance was justified may be decided as a matter of law if reasonable minds
can come to only one conclusion based on the facts. (9 Witkin, Cal. Procedure (3d ed. 1985)
Appeal, § 289, p. 301.)” (Guido v.
Koopman (1991) 1 Cal.App.4th 837, 843.)
“Reliance is ‘justifiable’ only when ‘circumstances were such to make it
reasonable for plaintiff to accept defendant's statements without an
independent inquiry or investigation.’ (Wilhelm
v. Pray (1986) 186 Cal.App.3d 1324, 1332, italics omitted.)” (Philipson & Simon v. Gulsvig
(2007) 154 Cal.App.4th 347, 363, parallel citations omitted.) The court cannot say at present that the
issue is so clear as to be decided as a matter of law at the pleading
stage. The demurrer is OVERRULED.
Breach of Fiduciary Duty
The second cause of action
is for breach of fiduciary duty and is brought by T3B only. The demurrer is
SUSTAINED WITH 30 DAYS’ LEAVE TO AMEND.
T3B alleges that “[d]efendants Reuben Bros. and Motcomb were
co-investors with Plaintiff T3B in the Project and were in a fiduciary
relationship with one another and owed each other a duty of utmost good faith
and fair dealing.” (Compl., ¶130.) But alleging the legal relationship does not
make it so. “ ‘[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.’ (Committee on Children's Television, Inc.
v. General Foods Corp. (1983) 35 Cal.3d 197, 221.)” (City of Hope National Medical Center v.
Genentech, Inc. (2008) 43 Cal.4th 375, 386, parallel citations
omitted.) The court does not understand
the basis of the fiduciary duty defendants allegedly owed T3B. In their opposition, plaintiffs cite no
authority indicating that co-investors owe fiduciary duties to other
investors. Instead, they generally
assert that T3B was owed a fiduciary duty because it holds a profit interest in
one of the entities in the funding stack for the project. The senior lenders, plaintiffs contend, have
obtained control over the affairs of all investors (including T3B) and the
entire project, which they assert is equivalent to a fiduciary duty. It is not.
“ ‘ “The essence of a fiduciary or confidential relationship is that the
parties do not deal on equal terms because the person in whom trust and
confidence is reposed and who accepts that trust and confidence is in a
superior position to exert unique influence over the dependent party.” ’ (Richelle L. v. Roman Catholic Archbishop,
supra, 106 Cal.App.4th at p. 271.)
Fiduciary obligations ‘generally come into play when one party's
vulnerability is so substantial as to give rise to equitable concerns
underlying the protection afforded by the law governing fiduciaries.’ (City of Hope National Medical Center v.
Genentech, Inc., supra, 43 Cal.4th at p. 389.) While it is impossible to identify a single
set of factors giving rise to a fiduciary relationship (id. at pp.
387–388), some reasons generally used to demonstrate that a party to such a
relationship is vulnerable include: advanced age, youth, lack of education, ill
health, and mental weakness. (Richelle
L. v. Roman Catholic Archbishop, supra, 106 Cal.App.4th at p. 280.)” (Brown v. Wells Fargo Bank, N.A.
(2008) 168 Cal.App.4th 938, 960, parallel citations omitted.) None of those characteristics are attributed
to T3B in its relationship with defendants.
The court adds that there
is no indication that this was a joint venture or anything similar. In fact, the allegations seem directly
contrary to such a relationship.
“[T]here are only three elements to show the existence of a joint
venture, which are similar to a general partnership: (1) joint interest in a
common business; (2) with an understanding to share profits and losses; and (3)
a right to joint control. (See 580
Folsom Assocs. v. Prometheus Dev. Co. (1990) 223 Cal.App.3d 1,
15–16.)” (Jacobs v. Locatelli
(2017) 8 Cal.App.5th 317, 328, fn. 10, parallel citations omitted.) “The existence of a fiduciary duty here
depends on whether the parties were in a joint venture with each other, since
partners or joint venturers have a fiduciary duty to act with the highest good
faith towards each other regarding affairs of the partnership or joint
venture. (BT–I v. Equitable Life
Assurance Society (1999) 75 Cal.App.4th 1406, 1410–1411; Laux v. Freed
(1960) 53 Cal.2d 512, 522.) The
essential element of a joint venture is an undertaking by two or more persons
to carry out a single business enterprise jointly for profit. (Nelson v. Abraham (1947) 29 Cal.2d
745, 749.)” (Pellegrini v. Weiss
(2008) 165 Cal.App.4th 515, 524–525, parallel citations omitted.) Those elements are not present here. No fiduciary relationship has been
sufficiently alleged.
Although the court has its
doubts as to whether this defect can be cured, California law virtually
mandates that T3B be given at least one chance to do so. Accordingly, leave to amend is granted, but
T3B ought not to be assured it will be granted a second time.
Breach of the Covenant of
Good Faith and Fair Dealing
Again, only T3B brings
this cause of action and alleges that defendants violated the duty of good
faith and fair dealing they owed to it “as a profit participant in the Project
and, as such, were obligated to allow Plaintiff T3B to receive the benefit of
its bargain as a stakeholder in the Project, and not to frustrate, interfere
with or otherwise deprive Plaintiff T3B of its contractual right to payment
under its profit interest.” (Compl.,
¶142.) Defendants persuasively argue that there is no contract alleged with T3B
in which they are a party. “The prerequisite
for any action for breach of the implied covenant of good faith and fair
dealing is the existence of a contractual relationship between the parties,
since the covenant is an implied term in the contract.” (Smith v. City and County of San Francisco
(1990) 225 Cal.App.3d 38, 48-49.)
Without the prerequisite contract, there can be no claim for breach of
the implied covenant of good faith and fair dealing. “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. (E.g., Waller
v. Truck Ins. Exchange, Inc. (1995) 11 Cal.4th 1, 36.) The covenant thus cannot ‘ “be endowed with
an existence independent of its contractual underpinnings.” ’ (Ibid., quoting Love v. Fire Ins.
Exchange (1990) 221 Cal.App.3d 1136, 1153.)
It cannot impose substantive duties or limits on the contracting parties
beyond those incorporated in the specific terms of their agreement.” (Guz v. Bechtel Nat. Inc. (2000) 24
Cal.4th 317, 349–350, parallel citations omitted, emphasis by Guz Court.)
T3B’s argument in
opposition seems to be that it is party to some unidentified contract and
defendants are depriving it of its right to payment under its profit interest
(pursuant to that contract). But this is
a roundabout way of stating that there is no contract between the parties. And that is the allegation as well:
“Plaintiff T3B holds an Internal Revenue Code ‘profit interest’ in the limited
liability company that is the ultimate downstream owner of the Project. Although T3B [unlike CMB] was not a party to
the sundry underlying loan agreements and intercreditor agreements, inter alia,
it has nonetheless been substantially harmed as the proximate result of Reuben
Bros.’ and Motcomb’s wrongful conduct as alleged herein and will continue to be
without Court intervention to protect its contractual interest.” (Compl., ¶6.)
To the extent T3B is
arguing that it is a third party beneficiary of some contract between
defendants and another party, the court is not sure it can state a claim for
breach of the implied covenant. Such
claims generally exist either between the actual parties to the contract or
perhaps in the insurance context where the non-party is an “insured” person
under the policy and is a claimant of benefits.
(See Jones v. Aetna Casualty & Surety Co. (1994) 26
Cal.App.4th 1717, 1722.) The demurrer is
therefore SUSTAINED WITH 30 DAYS’ LEAVE TO AMEND. Again, the court has its doubts as to whether
this problem can be cured, but T3B can take a stab at it.
Unfair Competition
The demurrer to this cause
of action is OVERRULED. “ ‘Because
Business and Professions Code section 17200 is written in the disjunctive, it
establishes three varieties of unfair competition—acts or practices which are
unlawful, or unfair, or fraudulent. “In
other words, a practice is prohibited as ‘unfair’ or ‘deceptive’ even if not
‘unlawful’ and vice versa.” ’ [Citations.]”
(Cel-Tech Communications, Inc. v. Los Angeles Cellular Telephone Co.
(1999) 20 Cal.4th 163, 180.) Defendants
assert that plaintiffs have not alleged any wrongful act. “When a plaintiff who claims to have suffered
injury from a direct competitor's ‘unfair’ act or practice invokes section
17200, the word ‘unfair’ in that section means conduct that threatens an
incipient violation of an antitrust law, or violates the policy or spirit of one
of those laws because its effects are comparable to or the same as a violation
of the law, or otherwise significantly threatens or harms competition.” (Id. at p. 187.) To plead an unlawful business practice, a
plaintiff must allege facts that demonstrate defendant’s conduct violated
another underlying law. (Farmers Ins.
Exchange v. Superior Court (1992) 2 Cal.4th 377, 383.)
Plaintiffs here have
adequately pled a fraudulent business practice.
“Generally, the question of ‘[w]hether a practice is deceptive or
fraudulent “cannot be mechanistically determined under the relatively rigid
legal rules applicable to the sustaining or overruling of a demurrer.” [Citation.]
Rather, the determination is one question of fact, requiring
consideration and weighing of evidence from both sides before it can be
resolved.’ (McKell, supra,142
Cal.App.4th at p. 1472.) ‘[U]nless we
can say as a matter of law that contrary to the complaint's allegations,
members of the public were not likely to be deceived or misled by [the
defendant's alleged conduct], we must hold that [plaintiffs] stated a cause of
action.’ (Morgan v. AT & T
Wireless Services, Inc. (2009) 177 Cal.App.4th 1235, 1257.)” (Klein v. Chevron U.S.A., Inc. (2012)
202 Cal.App.4th 1342, 1380–1381, parallel citations omitted.)
In opposition, plaintiffs also
claim they have alleged fraudulent concealment.
This is true. “The term ‘fraud’
is not predicated upon proof of the common law tort of deceit or deception but
simply means whether the public is likely to be deceived. (Committee on Children's Television, Inc.
v. General Foods Corp. (1983) 35 Cal.3d 197, 211; Klein v. Earth
Elements, Inc., supra, 59 Cal.App.4th at p. 970; State Farm Fire &
Casualty Co. v. Superior Court, supra, 45 Cal.App.4th at p. 1105.)” (Countrywide Financial Corp. v. Bundy
(2010) 187 Cal.App.4th 234, 257, parallel citations omitted.) Plaintiffs’ allegations, if true, would be
enough. And one might at least posit
that Reuben and CMB are competitors for these purposes. The court notes that it has its doubts as to
whether there is really enough here to get past a motion for summary judgment,
where Reuben will be able to present evidence and the court will be able to
interpret the contracts at issue unless the parol evidence (if any) is in dispute. But that is for another day.
Interference
The demurrer to the fifth
cause of action is SUSTAINED WITH 30 DAYS’ LEAVE TO AMEND. Defendants argue that T3B has not pled a
contractual relationship between some third party in which they interfered. The court agrees. “ ‘To recover in tort for
intentional interference with the performance of a contract, a plaintiff must
prove: (1) a valid contract between plaintiff and another party; (2)
defendant's knowledge of the contract; (3) defendant's intentional acts
designed to induce a breach or disruption of the contractual relationship; (4)
actual breach or disruption of the contractual relationship; and (5) resulting
damage. [Citation.] In this way, the
“expectation that the parties will honor the terms of the contract is protected
against officious intermeddlers.”
[Citation.]’ (Applied
Equipment Corp. v. Litton Saudi Arabia Ltd. (1994) 7 Cal.4th 503, 514, fn.
5.)” (Asahi Kasei Pharma Corp. v.
Actelion Ltd. (2013) 222 Cal.App.4th 945, 958, parallel citations omitted.)
As far as the court can
tell, the purported contract is T3B’s profit interest in CP Holdings. “Plaintiff T3B’s affiliate, NK Immigration
Services, LLC, formerly held an Internal Revenue Code ‘profit interest’ in CP
Holdings (referred to hereinafter as the ‘NK Economic Interest’). [¶] The NK Economic Interest was assigned and
transferred to Plaintiff T3B effective July 19, 2019. [¶] As such, at all times material to the
Complaint, Plaintiff T3B had a valid and existing contract.” (Compl., ¶¶152-154.) T3B has not adequately alleged that its
profit interest is a contract with CP Holdings.
Aside from that, T3B has
not alleged that the interference caused an actual breach or disruption of this
contract. The allegation is that
“Defendants Reuben Bros. and Motcomb intentionally caused a disruption of
Plaintiff T3B’s contractual relationship by their wrongful conduct designed to
devalue the Project, to prevent any refinancing of the Project, and to
eliminate the interests of all other stakeholders in the Project, inter
alia.” (Compl., ¶156.) That is
insufficient. T3B must allege that its
performance under its contract with CP Holdings has been breached or is more
costly or burdensome, not just that the contract has become less profitable. The current allegations do not address
this. In Pacific Gas & Electric
Co. v. Bear Stearns & Co. (1990) 50 Cal.3d 1118, our Supreme Court held
that a “[p]laintiff need not allege an actual or inevitable breach of contract
in order to state a claim for disruption of contractual relations. We have recognized that interference with the
plaintiff's performance may give rise to a claim for interference with
contractual relations if plaintiff's performance is made more costly or more
burdensome.” (Id. at p. 1129.) But the Supreme Court has never said that
merely because someone does something that lessens the value of another’s
contract, the action gives rise to the interference tort. That seems to be all that T3B is alleging
here.
T3B does allege
independently wrongful acts, i.e., fraud, but that fraud was only aimed at
plaintiff CMB. There is no fraud alleged
as to T3B. Thus, there is no
independently wrongful act alleged as to that plaintiff and the demurrer must
be SUSTAINED. As before, the court will
GRANT 30 DAYS’ LEAVE TO AMEND.
The demurrer to the
negligent interference with prospective economic advantage is SUSTAINED WITH 30
DAYS’ LEAVE TO AMEND. One of the
required elements of the claim is the duty of care to T3B. “ ‘The threshold element of a cause of action
for negligence is the existence of a duty to use due care toward an interest of
another that enjoys legal protection against unintentional invasion.
[Citations.]’ (Bily v. Arthur Young
& Co. (1992) 3 Cal.4th 370, 397.)
Whether a duty exists is a question of law to be determined by the
courts. (Ibid.) In the absence, as here, of a duty that
arises by statute or contract, we assess whether the nature of the activity or
the relationship of the parties gives rise to a duty. (Ratcliff Architects v. Vanir Construction
Management, Inc. (2001) 88 Cal.App.4th 595, 605.) ‘Recognition of a duty to manage business
affairs so as to prevent purely economic loss to third parties in their
financial transactions is the exception, not the rule, in negligence law’ (Quelimane Co. v. Stewart Title Guaranty
Co. (1998) 19 Cal.4th 26, 58), so courts are reluctant to impose duties to
prevent purely economic harm to third parties (Bily, at p. 403; Ratcliff,
at p. 605; Mission Oaks, supra, 65 Cal.App.4th at p. 725).” (Lake Almanor Associates L.P. v.
Huffman-Broadway Group, Inc. (2009) 178 Cal.App.4th 1194, 1205, parallel
citations omitted.)
There is no alleged
statutory or contractual duty here. The
court has considered the Biakanja factors. In Biakanja, our Supreme Court allowed
a negligence cause of action to go forward against an attorney who represented
a decedent but allegedly committed malpractice in preparing the will, thereby
largely disinheriting a beneficiary, who was the plaintiff. “The determination whether in a specific case
the defendant will be held liable to a third person not in privity is a matter
of policy and involves the balancing of various factors, among which are the extent
to which the transaction was intended to affect the plaintiff, the
foreseeability of harm to him, the degree of certainty that the plaintiff
suffered injury, the closeness of the connection between the defendant's
conduct and the injury suffered, the moral blame attached to the defendant's
conduct, and the policy of preventing future harm.” (Biakanja v. Irving (1958) 49 Cal.2d
647, 650.) Applying those factors, the
Court found that a cause of action in negligence could go forward.
The Biakanja factors
do not support the finding of a duty here by the senior lenders to a downstream
profit interest holder. First, T3B was
one of numerous parties to this massive construction loan scheme. Harm was of course foreseeable, but it rarely
is not. Foreseeability “ ‘is endless
because [it], like light, travels indefinitely in a vacuum.’ ” (Thing v. La Chusa (1989) 48 Cal.3d
644, 659, citing Newton v. Kaiser Foundation Hospitals (1986) 184
Cal.App.3d 386, 391.) T3B claims an
injury due to dilution of its profit interest, but there is a very attenuated
connection between defendants’ conduct and its injury. And while fraud is morally blameworthy and
should be prevented, that very far downstream harm is too far to be the basis
of a duty. The demurrer is SUSTAINED
WITH 30 DAYS’ LEAVE TO AMEND.
Declaratory Relief
The demurrer is
OVERRULED. Defendants only argue the
claim is duplicative. “ ‘Strictly
speaking, a demurrer is a procedurally inappropriate method for disposing of a
complaint for declaratory relief. As
Witkin observes: “[A] demurrer would leave the parties where they were, with no
binding determination of their rights, to await an actual breach and ensuing
litigation. This would defeat a
fundamental purpose of declaratory relief, to remove uncertainties as to legal
rights and duties before breach and without the risks and delays that it
involves. In brief, the object of
declaratory ‘relief’ is not necessarily a beneficial judgment; rather, it is a
determination, favorable or unfavorable, that enables the plaintiff to act with
safety. This theory has prevailed, and
the rule is now established that the defendant cannot, on demurrer, attack the
merits of the plaintiff's claim. The
complaint is sufficient if it shows an actual controversy; it need not show
that plaintiff is in the right.” (5 Witkin,
Cal. Procedure, (4th ed. 1997) Pleading § 831, pp. 288–289.)’ ” (Lockheed
Martin Corp. v. Continental Ins. Co. (2005) 134 Cal.App.4th 187, 221,
disapproved of on another ground by State of California v. Allstate Ins. Co.
(2009) 45 Cal.4th 1008, 1036, fn. 11.)
The court is not sure whether this cause of action is moot in light of
the sale, though. That issue was not
briefed.
Injunctive Relief
The demurrer is SUSTAINED
WITHOUT LEAVE TO AMEND. “Injunctive
relief is a remedy, not a cause of action.
(Art Movers, Inc. v. Ni West, Inc. (1992) 3 Cal.App.4th 640,
646.)” (City of South Pasadena v.
Department of Transportation (1994) 29 Cal.App.4th 1280, 1293, parallel
citations omitted.) That said, to the
extent any party wants an injunction, the court will allow an amendment, within
30 days, to set that relief forth as part of another cause of action and in the
prayer to the extent it has not already been done and to the extent that the
matter has not been rendered moot by virtue of the foreclosure sale.