Judge: Mark H. Epstein, Case: 22SMCV01852, Date: 2024-12-11 Tentative Ruling
Case Number: 22SMCV01852 Hearing Date: December 11, 2024 Dept: I
Plaintiffs sued defendants over financing issues relating to
the new Century Plaza Hotel. Plaintiffs
are a Mezzanine level lender and “Texas 3 Bobs,” an equity investor. (The parties essentially treated plaintiffs
as one, and the court will do the same for purposes of this motion.) The history of the case has been discussed in
prior court rulings. More specifically,
plaintiffs initially sought an injunction barring defendants from foreclosing
on their loan, which had the effect of wiping out plaintiff’s position (both as
lender and equity). The court ultimately
granted the injunction but imposed a very large bond because the law regarding
transfer fees had just changed. Under
the new law, set to take effect shortly after the motion was heard, there was a
huge surtax on property transfers over $10 million. Because this property was being sold at
auction, the tax would hit. Moreover,
because the property was worth a whoppingly large amount (to use the technical
legal term), the defense was able to make a compelling showing that if the
preliminary injunction was granted and the sale later went through, there would
be a massive tax increase. The court
therefore required a bond sufficient to guard against that increase. Because plaintiffs could not post the bond,
the injunction did not become effective and the sale went through. The case survives, though, as a damages
action.
So, what follows is a very brief synopsis of the facts,
which, like all brief synopses, is not as technically accurate or complete as
would be a longer recitation. Next
Century Partners (NCP) is an entity that was going to rebuild and redevelop the
iconic Century Plaza Hotel and two condominium towers. To do that, NCP secured over $1 billion in
construction financing. The Senior Loan
was for $446 million from JPMorgan. The
Senior Mezzanine Loan was for $120 million from CDCF. The Junior Mezzanine Loan was for $450
million from plaintiff CMB Export (CMB).
The structure in terms of the formal entities borrowing the money at the
various levels is complicated and discussed in prior rulings, but suffice it to
say that at the top of the borrower food chain is NCP, which created various
subsidiary borrower entities to borrow at the various levels. As a practical matter, the loans are secured
by the property. As is relatively
typical for this kind of financing structure, there was an Intercreditor
Agreement that defined the rights of the various lenders. This agreement was amended multiple times.
Things were moving along, and then COVID struck. As a result, in March 2020, JPMorgan, the
senior lender, declared the loan out of balance, even though a significant
amount of the loan had not yet been drawn upon.
Specifically, JPMorgan questioned whether NCP’s total funding would be
sufficient to complete the project. CMB
offered to assist in getting additional funding, but a requirement in doing so
would be that the additional funding would be senior to certain other
lenders. That offer was rejected. That allegedly led NCP to turn to defendant
Reuben Brothers (RB). (Although they are
different and served different functions, the court treats RB and Motcomb as
one, and the court believes the evidence establishes that they are on the same
side here.) Ultimately, RB agreed to
fund a $275 million increase in the Senior Mezzanine Loan. According to plaintiffs, that huge increase
in funding was not explained, but the bottom line is that through this action
RB became a participant in the Senior Mezzanine Loan. Plaintiffs allege,
though, that less than $200 million of the supposed $275 million was actually
available for the project and that RB demanded unfavorable terms.
Even so, on September 1, 2020, the senior Mezzanine lenders,
including RB, entered into a Third Amended and Restated Mezzanine Loan and
Security Agreement. And JPMorgan and the
other lenders entered into a fourth amendment of the Intercreditor Agreement to
memorialize consent to the increased amount.
Plaintiffs assert that, unbeknownst to them, defendants also entered
into a Participation Agreement that provided that RB’s interest was given
priority over the other senior Mezzanine lender’s interest and further
providing that upon default by the borrower, RB could seize indirect 100%
control over the project. The other
Senior Mezzanine Lender, CDCF, was also prohibited from assigning its interest
to plaintiffs without RB’s consent.
Plaintiffs were not parties to the Participation Agreement, nor were
they given a copy of it. There was also
a huge interest charge RB was allowed to impose for advances. The upshot was that when things continued to
go south, plaintiffs contend that they tried to buy CDCF’s interest in the
Senior Mezzanine Loan, but were not allowed to do so because RB would not
consent. Plaintiffs assert fraud stating
that they were told that the whole $275 million would be available to complete
the work when it wasn’t, and also that the Participation Agreement—which barred
CDCF from selling its interest to plaintiffs without RB’s consent—was not
disclosed. Plaintiffs allege that they
would not have entered into the fourth amended Intercreditor Agreement had they
known the truth.
On July 12, 2021, JPMorgan, the senior lender, informed
plaintiffs of a “Purchase Option Event” under the Intercreditor Agreement. The reason for the event was a failure to pay
the Senior Loan upon its maturity. Under
the operative Intercreditor Agreement, plaintiffs then had a one time right to
buy the Senior Loan (in whole, but not in part), and thereby become the senior
lender. According to plaintiffs,
though, JPMorgan stated that it would be willing to extend the maturity date if
additional equity was invested in the entity, although plaintiffs allege that
RB never told them of that position.
Plaintiffs did not exercise the option, but RB did (essentially),
thereby becoming the senior lender.
Ultimately, RB, sought to foreclose. Plaintiffs brought suit here to enjoin the
sale as it related to the Senior Loan.
In the meantime, suit was pending in the New York Supreme Court (the
trial court) to stop similar events from occurring, but relating to the Senior
Mezzanine Loan. At present, the defense
has filed a demurrer and also an MJOP.
That said, they are essentially the same motion and the court deals with
them together.
Preliminarily, the court GRANTS the request for judicial
notice of the contracts at issue and the New York court filings. The court OVERRULES the objections to the
contracts. The court can, and does,
consider the jural effect of a contract where the operative terms are not in
dispute and where the contract is central to the pleading, but no more.
One of the major issues raised by these motions is res
judicata and collateral estoppel. The
New York Supreme Court issued a preliminary injunction and denied a motion to
dismiss. That order was appealed to the
Appellate Division. (In New York,
virtually any order is immediately appealable, including the denial of a motion
to dismiss—the equivalent of a demurrer.
The intermediate appellate court is the Appellate Division of the New
York Supreme Court. Although technically
a part of the Supreme Court, it is considered to be the equivalent of a court
of appeal and its decisions are entitled to that sort of deference. The highest court in New York is the New York
Court of Appeals. The Supreme Court is
the trial court.) The Appellate Division
concluded that motion to dismiss should have been granted. It therefore directed that the case be
dismissed and, of course, that the injunction be dissolved. The Appellate Division has denied renewal
(the equivalent of rehearing) and denied leave to appeal to the New York Court
of Appeals; the New York decision is now final.
Plaintiffs make a series of arguments against application of res
judicata and collateral estoppel.
The court rejects plaintiffs’ waiver theory. The fact that these doctrines are not raised
in the answer is no bar. The court
cannot say that the failure to plead the doctrine is the intentional
relinquishment of a known right. And at
a minimum, the court sees no intent here by the defense to waive. (Old Republic Ins. Co. v. FSR Brokerage,
Inc. (2000) 80 Cal.App.4th 666.)
Further, this is a demurrer to a newly amended complaint. The moving parties (other than NCP) have not
filed an answer to the operative pleading, and therefore they cannot have
waived any affirmative defense.
The next question goes to the force of the New York
judgment. The court agrees with the
defense that New York law governs that question. Under the full faith and credit clause, this
court must afford a New York judgment same jural effect as it would have in New
York. (St. Sava Mission Corp. v.
Serbian Eastern Orthodox Diocese (1990) 223 Cal.App.3d 1354.) Under New York law, res judicata will bar
litigation of a claim or defense if, “in a former litigation between the
parties, or those in privity with them, in which there was a final conclusion,
the subject matter and the causes of action are identical or substantially
identical.” (Williams v. City of
Yonkers (N.Y. App. Div. 2018) 160 A.D.3d 1017 .) Thus, where the new claim is based on the
same transaction or occurrence, it will be barred as between the same parties
even if based on a different legal theory.
Collateral estoppel applies when the issues in both proceedings was
identical, the issue was actually litigated and decided, there was a full and fair
opportunity to litigate, and the issue previously litigated was necessary to
support the judgment. (Alamo v.
McDaniel (N.Y. App. Div. 2007) 44 A.D.3d 149, 153.)
Here, the New York appellate decision was essentially a
three page ruling of which only a few paragraphs deal with the issue here. (That is relatively typical for the Appellate
Division. Unlike the California Court of
Appeal, which tends to write lengthier and fuller opinions, the Appellate
Division writes very short, terse decisions, many of which assume quite a lot
of knowledge. That might just be a
function of tradition, or it might be because the intermediate appellate court
must deal with so many appealable rulings.)
Given the Appellate Division’s somewhat short ruling, it is a bit
difficult for this court to know precisely what was and was not adjudicated,
although in some ways it is clearer. The
bottom line, though, is that brevity does not bar application of res judicata
or collateral estoppel. If the issue was
truly decided, then the judgment will have collateral estoppel and res judicata
effect. CMB argues that the issues were
different inasmuch as the New York case involved the Senior Mezzanine Loan and
the instant case involves the Senior Loan.
That is an appealing argument, but ultimately not sufficient. The parties are in fact the same, or close
enough. The court tends to agree that
res judicata will not necessarily apply, but collateral estoppel is
harder. The problem with res judicata is
that the instant case was brought in California because it sought to bar the
sale of California property, and this is where the res is located. It is not clear to the court that this case
could have been brought in New York. If
it could not have been brought there, then claim preclusion (which is what res
judicata is) does not apply. That is
because the issues might be similar, but the subject matter of the causes of
action is not. It is hard to understand
how claim preclusion can act so as to allow a judgment in a state where a claim
could not be brought to bar an action in a state where the claim is properly
brought. Going back to the roots of
claim preclusion, it is to avoid claim splitting; to stop a plaintiff from
bringing multiple suits in multiple places for the same wrong. But the doctrine has no application where the
claim could not have been brought in the prior suit. So here.
The court is not confident that the case before it could have been
brought in New York, and, as such, the New York judgment will not act as a
merger or bar to the instant case. But
that is claim preclusion. Issue
preclusion—or collateral estoppel—is different.
Defendants argue that the while the opinion was short, the
New York Appellate Division was pretty clear concerning the fraud and
concealment questions and the Participation Agreement. Defendants’ briefing focuses on the
Participation Agreement, but more is alleged.
For example, plaintiffs argue that JPMorgan had told RB that it had
agreed to extend the maturity date but that RB had not disclosed that fact to
plaintiffs when seeking plaintiffs’ approval of the Intercreditor Agreement
amendment. Further, there are a number
of “side agreements” pled in the operative complaint, not just the
Participation Agreement, which is referred to in a draft. Similarly, the New York decision does not
discuss the consulting agreement, so the court cannot tell whether the New York
court actually adjudicated anything relating to that. All of that said, the court will not (and
cannot) second-guess the Appellate Division’s ruling. The court will discuss with the parties
specifically what, if anything, plaintiffs are alleging here that was not
adjudicated in the New York action. The
Appellate Division’s language seems to suggest that it considered all of the
fraud allegations and concealment allegations and found them to be without merit. Whether or not this court agrees is beside
the point. Further, while the Appellate
Division’s opinion may not have addressed every issue, at the end the court
states that it considered all of the arguments raised and found them to be
unavailing. Collateral estoppel does not
require a fully fleshed-out reasoning process; it only requires that the
factual issue have been decided on the merits.
If plaintiff can get past collateral estoppel, the next
argument is that the fraud and fraudulent concealment causes of action are not
pled with the requisite specificity. The
court notes that some of these arguments were raised with regard to the prior
demurrer, but not all of them. Like
fraud, fraudulent concealment must be pled with specificity. (Cansino v. Bank of America (2014) 224
Cal.App.4th 1462.) Although obviously
there are differences. In a fraud case,
the timing of the fraud and the specific false words must be pled. In a concealment case, the time is “never”
and the false words are nonexistent; that is the point. But the plaintiff in a concealment case must
say where there was a duty to disclose, and although “never” would be the date
of the mis-statement, the date when the statement ought to have been made can
still be known. In a fraud case, the
duty is easy. There is a general duty
not to lie. But in a concealment case,
there must be a duty to speak. That duty
can arise in a variety of ways, such as a fiduciary relationship between the
parties (which there was apparently not here) or where only one side has
knowledge of important salient facts, or where a disclosure is needed to make a
prior or contemporaneous statement not misleading, for example. In any event, our Supreme Court recently
clarified the issue. Where the duty
arose by virtue of the parties’ relationship and the defendant’s exclusive
knowledge, the complaint must allege the content of the omitted facts,
defendant’s awareness of them and the materiality of them, the inaccessibility
of that information to plaintiff, the general point at which the facts should
have been revealed, and justifiable and actual reliance. (Rattagan v. Uber Technologies, Inc.
(2024) 17 Cal.5th 1.) Plaintiffs have
done enough here. They allege that
defendants concealed the existence of the side agreements that would
essentially potentially extinguish their interest, and those agreements are
identified in the SAC. Plaintiffs allege
when the contracts were entered into and when they were concealed. Plaintiffs allege that this was part of a
wrongful scheme, and that the date when disclosure should have occurred is when
they entered into the contract. That is
enough. The court is aware that there
was some mention of other agreements in one of the draft term sheets. That was very important in the injunction
context, but not necessarily fatal now.
The court would need to know whether there were other indications of
side agreements and how obvious this reference was in the scheme of things
going on at the time.
Defendants nonetheless argue that there is no duty to
disclose because there is no fiduciary duty.
The court tends to agree that there was no fiduciary duty as amongst the
lenders, but that is not the only way such a duty can arise. As the court previously stated, where the
defendant has exclusive knowledge of a material fact of which plaintiff
unaware, that could be enough.
Similarly, affirmative conduct to conceal may be enough, as can be the
failure to speak so as to make another representation not misleading. (LiMandri v. Judkins (1997) 52
Cal.App.4th 326.) Any or all of those
situations may well be present here.
Defendants also contend that the concealment or misrepresentation was
not material. The court cannot decide
that at this time and the argument is predicated on facts outside the
pleadings. The court notes that the
level of specificity needed is a California question of pleading, and is not
governed by New York law. In contrast,
though, the existence of a duty to speak would be (at least at first blush) a
question of New York law inasmuch as the contracts were to be interpreted in
accord with New York law. And this issue
was discussed (briefly) in the Appellate Division’s decision. So we essentially are where we were
before. As a matter of pleading, the
complaint will survive. But as a matter
of collateral estoppel, it might not.
Defendants also attack the aiding and abetting
allegation. Aiding and abetting
liability may be imposed on one who aids and abets the commission of an
intentional tort. It requires that the
defendant know that the principal’s conduct constitutes a breach of duty and
that the aider and abettor give substantial assistance or encouragement to the
other to so act; or gives substantial assistance to one in accomplishing a tort
and the person’s own conduct, separately considered, is a breach of duty. (Saunders v. Superior Court (1994) 27
Cal.App.4th 832.) Here, for example,
Rosenfeld is alleged to have entered into a lucrative consulting contract with
RB in return for which Rosenfeld agreed not to tell plaintiffs of the potential
extension of the maturity date. That is
enough at the pleading stage. Another
cause of action is predicated on Rosenfeld’s knowledge of RB’s alleged
interference with plaintiff’s loan agreement and its rights as junior Mezzanine
Lender, arguing that defendants entered into side agreements to deprive
plaintiffs and others from enjoying the benefit of their positions. Again, that is enough for the pleading
stage. The demurrers as to these causes
of action is OVERRULED and the MJOP is DENIED.
The analysis is a bit different as to the conspiracy theories. Civil conspiracy is not a tort in California;
rather it is a doctrine that extends liability to those conspiring to commit a
tort. (Richard B. LeVine, Inc. v.
Higashi (2005) 131 Cal.App.4th 566.)
The court could, therefore, sustain the demurrers as to civil
conspiracy. However, the court is more
inclined to view those causes of action as essentially pleading the underlying
tort and explaining that liability as against those not actually committing the
tort is established by the conspiracy.
For that reason, the demurrers to conspiracy are OVERRULED and the MJOP
is DENIED. The court notes that this
issue is likely to be governed by California law. That said, though, if the underlying torts
are barred, aiding and abetting cannot stand alone (and the same is true of
conspiracy). But, if collateral estoppel
applies, it will bar this cause of action.
Defendants also attack the complaint as to the interference
cause of action. Defendants note that
the Intercreditor Agreement states that any such cause of action is
waived. The court tends to agree up to a
point. To the extent that defendants
exercised their rights under the Intercreditor Agreement in a manner otherwise
lawful, no cause of action for interference will lie. To that extent, the demurrer is well
taken. But the court does not read the
Intercreditor Agreement as immunizing conduct that is otherwise a tort from
also being interference. Thus, for
example, if defendants tortiously concealed certain information from
plaintiffs, and if that concealment also interfered with plaintiffs’ contract,
interference would lie. It is not
possible to say at this point that all of the acts giving rise to this cause of
action are divorced from independently wrongful conduct, and therefore the
demurrer must be OVERRULED and the MJOP be DENIED. The court is not sure whether interference
would be decided under California or New York law, but the Appellate Division’s
decision did not address the question directly.
The real problem is that if the underlying actions are not improper,
then there is no interference. Thus, if
collateral estoppel applies, it will bar this cause of action.
The last cause of action is under the Unfair Competition Law
(UCL). That statute bars competition
that is unlawful, unfair, or fraudulent.
Defendants assert that plaintiffs have alleged no such act. The court cannot agree as a matter of
pleading. To the contrary, plaintiffs
have (as discussed above) alleged fraud and fraudulent concealment. That is enough for now. The demurrer is OVERRULED and the MJOP is
DENIED. And there is enough of an injury
alleged here, especially as both plaintiffs and some defendants are competitors
(they are both lenders), and indeed, plaintiffs at one point attempted to
become part of the Senior Mezzanine Loan level.
But having said that, if collateral estoppel applies, it will bar this
cause of action as well.
Therefore, the court will discuss collateral estoppel with
the parties. If it applies, it could
well be that the case is over. If not,
then the court believes that the matter will go forward to trial.