Judge: Melissa R. Mccormick, Case: "Hodge v. OC Media Tower, L.P., et al.", Date: 2022-11-03 Tentative Ruling

Defendants OC Media Tower, L.P., OCR Land, LLC, Urban Press, LLC, Southwest Property Investments, Inc., Caribou Industries, Inc., and Michael F. Harrah’s Demurrer to First Amended Complaint

Defendants OC Media Tower, L.P., OCR Land, LLC, Urban Press, LLC, Southwest Property Investments, Inc., Caribou Industries, Inc., and Michael F. Harrah demur to the third, fourth, fifth and seventh causes of action in plaintiff V. Lynn Hodge’s first amended complaint.  For the following reasons, defendants’ demurrer to the fourth cause of action is sustained with leave to amend; defendants’ demurrers to the third, fifth, and seventh causes of action and to the alter ego allegations is overruled.

In ruling on a demurrer, a court must accept as true all allegations of fact contained in the complaint.  Blank v. Kirwan (1985) 39 Cal.3d 311, 318.  A demurrer challenges only the legal sufficiency of the affected pleading, not the truth of the factual allegations in the pleading or the pleader’s ability to prove those allegations.  Cundiff v. GTE Cal., Inc. (2002) 101 Cal.App.4th 1395, 1404-05.  Questions of fact cannot be decided on demurrer.  Berryman v. Merit Prop. Mgmt., Inc. (2007) 152 Cal.App.4th 1544, 1556.  Because a demurrer tests only the sufficiency of the complaint, a court will not consider facts that have not been alleged in the complaint unless they may be reasonably inferred from the matters alleged or are proper subjects of judicial notice.  Hall v. Great W. Bank (1991) 231 Cal.App.3d 713, 718 n.7.

This action arises out the sale of real property located in Santa Ana, California in October 2020.  Plaintiff alleges defendants sold the property for $63.2 million despite telling plaintiff the property could sell for only $50 million.  Plaintiff alleges that based on this representation plaintiff accepted a reduced payoff amount for an outstanding debt.

Plaintiff’s third cause of action alleges quiet title against OC Media Tower, L.P.  The elements of a cause of action for quiet title are:  (i) a description of the property including both its legal description and its street address or common designation; (ii) the plaintiff’s title and the basis upon which it is asserted; (iii) the adverse claims as against which a determination is sought; (iv) the date as of which a determination is sought and, if other than the date the complaint is filed, a statement why the determination is sought as of that date; and (v) a prayer for determination of plaintiff’s title against the adverse claims.  Cal. Civ. Proc. Code § 761.020.

Although ordinarily an action to quiet title cannot be maintained by the owner of equitable title against the holder of legal title, an exception exists where legal title was acquired through fraud.  In such a fraud case, the holder of equitable title may bring an action to quiet title as against the legal title holder, who acquired “only bare legal title” and holds legal title as a constructive trustee for the benefit of the equitable title holder.  Warren v. Merrill (2006) 143 Cal.App.4th 96, 113-14.

The limited exception permitting the holder of an equitable interest to maintain a quiet title action against a legal owner is narrow and has been recognized primarily in cases involving fraud or breach of fiduciary duty by the holder of legal title.  See, e.g., Strong v. Strong (1943) 22 Cal.2d 540, 545-46 (equitable rights could not be established in quiet title action absent finding of fraud); Warren v. Merrill, 143 Cal.App.4th at 111-12 (judgment quieting title was proper in light of real estate agent’s breach of fiduciary duty to purchaser arising from agent’s fraudulent procurement of title to property).

The court sustained defendants’ prior demurrer to this cause of action because plaintiff had not alleged sufficient facts showing Harrah and the Companies acquired legal title through fraud.  Plaintiff has sufficiently remedied this issue in the first amended complaint.  See, e.g., FAC ¶¶ 78, 84, 159, 164-166.  The third cause of action alleges Plaza del Sol Real Estate Trust (PDS) was the beneficiary of a $27 million Deed of Trust (DOT) and a $34 million DOT, which were recorded on parcels 1, 2 and 3 of the North Grand Property. FAC ¶ 159.  The third cause of action further alleges defendants induced PDS into entering the stipulated payoff demand by falsely representing, in March 2020, that $50,551,325 was the most Alliant would pay for the entire 625 North Grand property and that there were no other buyers who would pay more.  FAC ¶¶ 78, 164. The first amended complaint sufficiently alleges Harrah acquired legal title to the 625 North Grand property through fraud.

The beneficiary of a deed of trust containing a power of sale may proceed with a nonjudicial foreclosure sale upon default by the trustor.  See Moeller v. Lien (1994) 25 Cal.App.4th 822, 830.  The beneficiary’s power to cause a sale of the property is, in practical effect, a lien on the property.  Monterey S.P. Partnership v. W.L. Bangham (1989) 49 Cal.3d 454, 460.  The beneficiary’s security interest in the property may be the subject of a quiet title action.  See Cal. Civ. Pro. Code § 760.010(a).  Here, if plaintiff prevails in his attempt to set aside the Stipulated Payoff Demand and the parties are restored to the positions they held prior to the sale, PDS could potentially be the holder of a security interest in the 625 North Grand property and may thus bring a quiet title claim.  Defendants’ factual arguments about the allegations with which defendants disagree cannot be resolved on demurrer.  Defendants’ demurrer to the third cause of action is overruled.    

Plaintiff’s fourth cause of action alleges breach of fiduciary duty against all defendants other than First American Title Insurance Company.  Defendants contend that the fourth cause of action fails because the first amended complaint does not allege facts sufficient to show the existence of a fiduciary duty.

“‘The elements of a cause of action for breach of fiduciary duty are the existence of a fiduciary relationship, its breach, and damage proximately caused by that breach.  [Citation.]’  [Citation.]”  Knox v. Dean (2012) 205 Cal.App.4th 417, 432.  For a fiduciary duty to exist, a person “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.”  City of Hope Nat'l Med. Ctr. v. Genentech, Inc. (2008) 43 Cal.4th 375, 386.  “A fiduciary or confidential relationship can arise when confidence is reposed by persons in the integrity of others, and if the latter voluntarily accept[s] or assume[s] to accept the confidence, they cannot act so as to take advantage of the others’ interests without their knowledge or consent.”  Tri-Growth Ctr. City, Ltd. v. Silldorf, Burdman, Duignan & Eisenberg (1989) 216 Cal.App.3d 1139, 1150.

Fiduciary and confidential relationships give rise to a fiduciary duty, that is, a duty “to act with the utmost good faith for the benefit of the other party.”  Persson v. Smart Inventions, Inc. (2005) 125 Cal.App.4th 1141, 1160 (quoting Bacon v. Soule (1912) 19 Cal.App. 428, 434).  “‘Technically, a fiduciary relationship is a recognized legal relationship such as guardian and ward, trustee and beneficiary, principal and agent, or attorney and client . . . whereas a “confidential relationship” may be founded on a moral, social, domestic, or merely personal relationship as well as on a legal relationship.’”  Persson, 125 Cal.App.4th at 1160 (citations omitted).  A confidential relationship may exist where there is no fiduciary relationship.  Vai v. Bank of America (1961) 56 Cal.2d 329, 337-38.  “Because confidential relations do not fall into well-defined categories of law and depend heavily on the circumstances, they are more difficult to identify than fiduciary relations.”  Richelle L. v. Roman Catholic Archbishop (2003) 106 Cal.App.4th 257, 271.  The existence of a confidential relationship is a question of fact, and “‘the question is only whether the plaintiff actually reposed such trust and confidence in the other, and whether the other “accepted the relationship.”’” Richelle L., 106 Cal.App.4th at 272 n. 6 (citation omitted).  A “relationship” must exist over a period of time.  Id.

The essential elements of a confidential relationship that gives rise to a fiduciary duty are:  “1) The vulnerability of one party to the other which 2) results in the empowerment of the stronger party by the weaker which 3) empowerment has been solicited or accepted by the stronger party and 4) prevents the weaker party from effectively protecting itself.”  Richelle L., 106 Cal.App.4th at 272 (citation omitted). “The vulnerability that is the necessary predicate of a confidential relation . . . usually arises from advanced age, youth, lack of education, weakness of mind, grief, sickness, or some other incapacity.” Id. at 273.

The first amended complaint alleges PDS is unlike a traditional lender because it is held in trust for the benefit of MCWE, a non-profit religious organization, and that the relationship between PDS and Harrah and the Companies is unlike a traditional lender-borrower relationship because Harrah and the Companies have a long-standing relationship of trust and confidence with PDS.  FAC ¶ 180.  Morris Cerullo, the President and Chairman of MCWE, and Harrah allegedly had a long-standing personal friendship and relationship of trust and confidence that resulted in several joint ventures between MCWE/PDS and Harrah and the Companies.  FAC ¶ 181.

That Cerullo and Harrah were friends and business associates does not as a general proposition, without more, create a fiduciary or confidential relationship.  See Worldvision Enterprises, Inc. v. American Broadcasting Companies, Inc. (1983) 142 Cal.App.3d 589, 595 (“mere fact that in the course of their business relationships the parties reposed trust and confidence in each other does not impose any corresponding fiduciary duty in the absence of an act creating or establishing a fiduciary relationship known to law”); Schultz v. Steinberg (1960) 182 Cal.App.2d 134, 138 (“‘[i]n the absence of a showing of the exercise of undue influence mere friendship does not constitute a confidential relationship’”).  The first amended complaint alleges PDS’s trustees, Lynn Hodge, Roger Artz, and Cerullo, were of advanced age (FAC ¶¶ 72, 85) and plaintiff asserts Cerullo was ill.  The first amended complaint lacks facts, however, alleging how these potential vulnerabilities prevented PDS and its trustees from protecting themselves.  Plaintiff has not cited relevant legal authority that a business’s alleged need for overdue funds is a vulnerability that results in a confidential relationship.

Plaintiff also has not alleged a joint venture relationship in connection with the Notes.  Although the first amended complaint alleges a joint venture in connection with the property located at 888 North Main (FAC ¶¶ 58-60), plaintiff referred to the deal involving the 625 North Grand parcels as loans (FAC ¶¶ 71-72).  The demurrer to the fourth cause of action is sustained with leave to amend.

Plaintiff’s fifth cause of action alleges breach of contract against all defendants other than Caribou and First American.  The fifth cause of action alleges OC Media, OCR Land, and Urban Press defaulted and did not pay the unpaid principals when their notes became due, and failed to obtain plaintiff’s written consent prior to selling the secured property or any interest therein.  FAC ¶¶ 197-261.  The fifth cause of action also alleges that Harrah and Southwest, as guarantors, failed to pay the $27 million dollar note.  FAC ¶ 216. 

The elements of a cause of action for breach of contract are:  (1) the contract; (2) the plaintiff’s performance or excuse for nonperformance; (3) the defendant’s breach; and (4) resulting damages to the plaintiff.  Coles v. Glaser (2016) 2 Cal.App.5th 384, 391.

Defendants contend plaintiff cannot state a cause of action for breach of a promissory note, deed of trust, and/or guaranty because the parties’ Stipulated Payoff Demand is a novation.  “Novation is the substitution of a new obligation for an existing one.”  Cal. Civ. Code § 1530.  Parties may achieve novation “[b]y the substitution of a new obligation between the same parties, with intent to extinguish the old obligation.”  Cal. Civ. Code § 1531.  “Novation is made by contract, and is subject to all the rules concerning contracts in general.”  Cal. Civ. Code § 1532.  Consent to a contract is not real or free when obtained through fraud or mistake.  Cal. Civ. Code § 1567.  A contract made under such conditions is “not absolutely void,” but may be rescinded in the manner prescribed by the chapter on rescission.  Id. § 1566.  A party may rescind a contract if his consent was given by mistake or fraud (id. § 1689), “a contract is extinguished by its rescission” (id. § 1688), and a party may bring an action in which it asserts rescission (id. § 1692).  The first amended complaint sufficiently alleges defendants obtained the Stipulated Payoff Demand through fraud.  FAC ¶¶ 78, 159, 164, 198-203.  In addition, the first amended complaint alleges a cause of action for rescission.  FAC ¶¶ 310-318.  The demurrer to the fifth cause of action is overruled.  See Restatement (Second) of Contracts § 279 (“[T]o the extent that the substituted contract is vulnerable on such grounds as mistake, misrepresentation, duress or unconscionability, recourse may be had on the original duty.”).

Plaintiff’s seventh cause of action alleges breach of the implied covenant of good faith and fair dealing against all defendants other than Caribou.  The elements of an implied covenant claim are:  (i) a contract; (ii) the defendant’s actions pursuant to the contract that destroys or injures the rights of the plaintiff to receive the benefits of the contract; and (iii) resulting damages.  Waller v. Truck Ins. Exchange, Inc. (1995) 11 Cal.4th 1, 36. 

Defendants contend the seventh cause of action fails to state a claim because the Stipulated Payoff Demand was a novation and because plaintiff does not allege a breach of the implied covenant beyond breach of a contractual duty.  The first amended complaint sufficiently alleges defendants fraudulently induced the Stipulated Payoff Demand.  Plaintiff also alleges a breach by defendants beyond their alleged contractual duty to make payments on the loans and pay the unpaid principal when the notes became due.  The first amended complaint alleges defendants prevented PDS from receiving the benefits under the respective agreements by promoting the prospective Alliant sale as the most lucrative option, and by concealing the Amazon deal to induce PDS to sign the Stipulated Payoff Demand.  FAC ¶¶ 68-118, 275.  The demurrer to the seventh cause of action is overruled.

Plaintiff’s first amended complaint alleges sufficient facts supporting plaintiff’s alter ego allegations.  See, e.g., FAC ¶¶ 20-26; see Leek v. Cooper (2011) 194 Cal.App.4th 399, 415 (to recover on an alter ego theory, a plaintiff “must allege sufficient facts to show a unity of interest and ownership, and an unjust result if the corporation is treated as the sole actor”).  Defendants’ demurrer to the alter ego allegations is overruled.

Plaintiff’s request for judicial notice is denied.  It is not necessary to seek judicial notice of documents in the court file for this case.

Should plaintiff desire to file an amended complaint that addresses the issues in this ruling, plaintiff must file and serve it by November 17, 2022.

Plaintiff to give notice.