Judge: Mark H. Epstein, Case: 23SMCV00723, Date: 2024-12-23 Tentative Ruling
Case Number: 23SMCV00723 Hearing Date: December 23, 2024 Dept: I
This matter is
technically here for an FSC, but in reality, it is here to discuss a
default judgment. (As a result, of
course no FSC papers were submitted.)
Defendants are in default, so the matter is ready for a “prove up” or
585 determination. To the extent it has
not already been done, the court will DISMISS the DOE defendants.
This case arises from a fraud. Plaintiff asserts that defendants essentially
created a fraudulent scheme concerning an investment in a gold mine in
Africa. Due to shared contacts in the
industry, plaintiff trusted the defense and fell for it. Defendants stated that the “profit marker”
was 60% so that the more one invested, the more one made. Plaintiff agreed to invest $100,000. Defendants promised that the money would come
pouring in such that the anticipated profit could be realized in a scant two
months. Sound too good to be true? It was.
The whole thing was a fake from stem to stern apparently. In any event, defendants pressured plaintiff
to wire the money quickly because the money was needed for equipment and
supplies. Although there is apparently
no written document so stating, defendants allegedly orally promised that the
profit would be realized in two months and therefore plaintiff would receive
$160,000 in September 2022—two months after the July 2022 investment. Of course, we all know how this movie
ends. At first, when the $160,000 check
did not appear, defendants contended that there was nothing to worry
about—there was just a delay but the money would be coming. And yet, the money never came. Eventually, plaintiff realized that this was
a scam and sued. Defendants did not
answer and they were defaulted. One
defendant, Coti Williams, moved to set aside the default, but the court denied
the motion. As such, the matter is now
ripe for entry of a default judgment.
Plaintiff seeks $160,000 in damages under a breach of
contract theory. Plaintiff also seeks
treble damages (maybe) and attorneys’ fees claiming that such fees are allowed
under Penal Code sections 496 and 484.
Those statutes deal with receipt of stolen property and section 496
expressly states that in a civil suit for such conduct a prevailing plaintiff
is entitled to treble damages and attorneys’ fees. Plaintiff also seeks prejudgment interest on
the $160,000.
The court has some trouble with this. The court has little doubt but that this was
fraud. Plaintiff has therefore
established an entitlement to a return of the $100,000 spent plus (in the
court’s discretion, which it exercises in plaintiff’s favor) prejudgment
interest at the legal rate on that sum.
(The court might be able to award a lower interest rate but compound it. However, simple interest at 10% is the better
option for plaintiff.) Interest would
also be available on this sum under a contract theory.
The court first turns to the $60,000 profit. Under a traditional fraud analysis, that is
not recoverable. The measure of damages
for fraud is the difference between what one paid for something and what it was
actually worth. Here, plaintiff paid
$100,000 for something that was worthless.
Only under a contract theory does one get the lost profits. Plaintiff acknowledges as much, and asserts
that the $60,000 should be recovered under that theory. Where a contract sets forth the profits, they
can be recoverable as damages; it is part of the benefit of the bargain. (Plaintiff also claims that this is a farming
contract and governed by authority relating to farming. It is not.
Despite plaintiff’s claim to the contrary, this was not “farming
gold.”) The problem here is that the
contract is not so clear. First, there
is no written contract. Second, there
are two sorts of things in the world (as relevant here). One is an investment and the other is a loan. An investment generally entails the risk of
loss—that is not only the credit risk of the borrower, but also the risk that
the venture will not be profitable. In
that circumstance, the “profits” are rarely, if ever, truly “certain.” They might well be anticipated, but they are
not promised; that is the whole point of an investment: it entails risk. And such is the case here. The 60% was a “profit marker,” whatever that
means. The court assumes it means the
hoped-for profits, and perhaps a preferential return. But it is hard to see that as a guarantee. Maybe the oral contract was sufficiently
clear that it was a guaranteed return, but the court has some trouble with a
60% guaranteed return in a two month period in an African gold mining venture
based on an alleged oral agreement. And
plaintiff does not specify exactly what words were used. The court is aware of the James v. Herbert
case, but it does not support plaintiff’s position. ((1957) 149 Cal.App.2d 741.) That case also involved an investment and the
court there held that a claim for the lost profits would overcome a demurrer
based on speculation. But that case was
different. There, the venture was
real. The parties to it invested cash,
land, and expertise to secure land and rights on it. The theory was to subdivide and develop the
land and sell off the parcels at a profit.
The parties were to divide the profits among them. They had a business plan that explained that
they would subdivide the property into 196 parcels, develop them, and sell them
at a profit of $1000 each, yielding $196,000 in total profits. However, two of the three investors allegedly
decided to cut the third out of the equation and take the money for
themselves. Although the profits had not
yet been realized, the third investor sued and sought the lost anticipated
profits. The court held that the profits
alleged there were sufficiently definite to withstand a demurrer. After all, the land was real, the rights were
real, the subdivisions were real, and the anticipated sales were real. In short, that case involved a real business,
not a scam from the get-go. Here, of
course, there was no business plan; there was no business at all. In James, the bad act was cutting the
third investor out of the deal; here the bad act is fraud. The case is distinguishable. To illustrate (using an extreme example,
articulated only to make the point), if defendants had “sold” plaintiff the
Brooklyn Bridge, the damages would not be the value of the Brooklyn Bridge,
whether in contract or tort.
Accordingly, the court will not award the “lost profit” on a contract
investment theory. The other sort of
thing in the world is a loan. That is
different. If one loans someone money,
the lost interest is recoverable in contract.
The problem here is that this was not a loan. (And if it were, a 60% return in two months
sounds a bit usurious.)
As to trebling and fees, plaintiff is right that they are
recoverable under the Penal Code. The
problem is that plaintiff did not sue under the Penal Code. Because plaintiff brought no cause of action
relating to those statutes, defendants had no notice that the enhanced recovery
allowed by those statutes was at stake.
It denies them of due process to award such a recovery now. The court does not love that
decision—especially regarding the fees.
It is hard to shed a lot of tears for a fraudster (or pair of them)
being denied due process in having to pay the victim’s legal fees. But that seems to the court to be the law and
the court’s hands are therefore tied.
At bottom, the court will enter judgment in the amount of
$100,000 along with prejudgment interest at the rate of 10% per year (simple)
from the date of the investment to the date of the judgment (which is
$24,333). Plaintiff is also entitled to
recovery costs, but not fees. Interest
on the total sum will accrue at the legal rate of 10% from the date judgment is
entered until paid.