Judge: Richard Y. Lee, Case: 30-2022-01249738, Date: 2022-08-25 Tentative Ruling

Defendant, LPL Financial LLC (“LPL”) moves for an order sustaining a demurrer to the Verified Complaint (“Complaint”) filed by Plaintiff, The Yu Family Trust, by trustee Win Lin Yu (“Plaintiff” or “Yu”), and the First Cause of Action for Breach of Fiduciary Duty, and Second Cause of Action for Financial Elder Abuse on the ground that the Complaint fails to state facts sufficient to constitute a cause of action because each cause of action is barred by the applicable statute of limitations.

LPL contends that Plaintiff’s claims for breach of fiduciary duty and financial elder abuse in connection with Plaintiff’s investment in Northstar Healthcare REIT (“Northstar REIT”) are barred by the three-year statute of limitations under Code of Civil Procedure section 338, and four-year statute of limitations under Welfare & Institutions Code section 15657.7, respectively. LPL contends that allegations in the Complaint, the documents incorporated by reference therein, and the documents that are judicially noticeable, including Plaintiff’s Statement of Claim in a FINRA arbitration proceeding, and an SEC filing by American Realty Capital Hospitality Trust, Inc.,  make clear that Plaintiff was on inquiry notice of his claims against Defendant Lei Shen a/ka Peter Shen (“Shen”), and by extension LPL, as of 2016. LPL contends that such documents show that Plaintiff became aware of facts that would lead a reasonably prudent person to suspect that the Northstar REIT investment was not a safe and conservative investment when another REIT, American Realty Capital Hospitality Trust, Inc., that Shen had sold to Yu, suspended cash distributions due to financial difficulties in April 2016.

Plaintiff contends that LPL’s argument that the action is time-barred fails as the demurrer improperly relies on documents outside the Complaint for the truth of the matters stated therein to dispute the Complaint’s allegations which must be assumed as true. Plaintiff argues that LPL relies on an unsworn, unauthenticated July 30, 2021 Statement of Claim submitted to FINRA, and an unsworn, unauthenticated 2016 form from American Realty Capital Hospitality Trust, Inc. who is not a party here. Plaintiff also contends that LPL incorrectly relies on the three-year statute of limitations for fraud where no fraud is alleged, and that the causes of action are subject to a four-year limitations period. Plaintiff additionally asserts that the issues LPL raises are questions of fact as LPL’s contentions contradict the allegations in the Complaint, and that resolution of questions of fact is improper at the demurrer stage. Plaintiff further argues that LPL’s demurrer ignores Plaintiff allegation that it learned of Defendants’ wrongful actions in May 2021 which is within either a three-year or four-year statute of limitations, and the existing fiduciary duty and delayed discovery and tolling doctrines of statutes of limitations that are alleged in the Complaint including that Plaintiff’s claims are tolled while the FINRA arbitration was pending which is not challenged by the demurrer; and that the Complaint expressly alleges tolling of the statute of limitations under California’s settled rule that fiduciary duty limits the duty of inquiry by the Plaintiff, Thus, Plaintiff requests the Court overrule LPL’s demurrer in its entirety, or alternatively, grant Plaintiff leave to amend if the demurrer is sustained in whole or in part.

Meet and Confer

The Declaration of Jeffrey K. Compton establishes compliance with the meet and confer requirements of Code of Civil Procedure section 430.41. (Declaration of Jeffrey K. Compton, ¶¶ 2.)

Merits

A demurrer can be used only to challenge defects that appear within the “four corners” of the pleading – which includes the pleading, any exhibits attached, and matters of which the court is permitted to take judicial notice. (Blank v. Kirwan (1985) 39 Cal.3d 311, 318; Donabedian v. Mercury Ins. Co. (2004) 116 Cal.App.4th 968, 994.) On demurrer, a complaint must be liberally construed. (Code Civ. Proc. § 452; Stevens v. Superior Court (1999) 75 Cal.App.4th 594, 601.) All material facts properly pleaded, and reasonable inferences, must be accepted as true. (Aubry v. Tri-City Hospital Dist. (1992) 2 Cal. 4th 962, 966-67.)

Where the complaint discloses that the statute of limitations bars the action, a general demurrer is an appropriate means to assert such a facial defect.  (Saliter v. Pierce Brothers Mortuaries (1978) 81 Cal.App.3d 292, 300 n. 2; Iverson, Yoakum, Papiano & Hatch v. Berwald (1999) 76 Cal.App.4th 990, 995; Vaca v. Wachovia Mortg. Corp. (2011) 198 Cal.App.4th 737, 746.)

“A general demurrer based on the statute of limitations is only permissible where the dates alleged in the complaint show that the action is barred by the statute of limitations. [Citation.] The running of the statute must appear “clearly and affirmatively” from the dates alleged. It is not sufficient that the complaint might be barred. [Citation.] If the dates establishing the running of the statute of limitations do not clearly appear in the complaint, there is no ground for general demurrer. [Citation.]” (Roman v. County of Los Angeles (2000) 85 Cal.App.4th 316, 324–325.)

A statute of limitations runs from the moment a claim accrues. (Aryeh v. Canon Business Solutions, Inc. (2013) 55 Cal.4th 1185, 1191.) “Traditionally at common law, a ‘cause of action accrues “when [it] is complete with all of its elements”—those elements being wrongdoing, harm, and causation.’ [Citation.]” (Ibid.)

California courts allow an exception, known as the “delayed discovery rule,” to suspend a statute of limitations. Under this exception, a statute of limitations is deemed to run when a plaintiff suspects or should suspect that his/her injury was caused by wrongdoing. (See Jolly v. Eli Lilly & Co. (1988) 44 Cal. 3d 1103, 1110.) A plaintiff whose complaint shows on its face that his claim would be barred without the benefit of the discovery rule has certain pleading burdens. He must specifically plead facts to show (1) the time and manner of discovery and (2) the inability to have made earlier discovery despite reasonable diligence. The burden is on the plaintiff to show diligence; conclusory allegations will not suffice. (E-Fab, Inc. v. Accountants, Inc. Services (2007) 153 Cal.App.4th 1308, 1319; Cansino v Bank of America (2014) 224 Cal.App.4th 1462.)  The discovery related facts should be pleaded in detail to allow the court to determine whether the fraud should have been discovered sooner. (Cansino, supra, 224 Cal.App.4th at 1472.) 

“To determine the statute of limitations which applies to a cause of action it is necessary to identify the nature of the cause of action, i.e., the ‘gravamen’ of the cause of action. [Citations.] ‘[T]he nature of the right sued upon and not the form of the action nor the relief demanded determines the applicability of the statute of limitations . . . .’ [Citation.]” (Hensler v. City of Glendale (1994) 8 Cal.4th 1, 22-23.) “Thus, if a complaint alleges acts of actual and constructive fraud but frames its cause of action as one for breach of fiduciary duty, the statute of limitations for fraud applies. [Citation.]” (Professional Collection Consultants v. Lujan (2018) 23 Cal.App.5th 685, 691.)

As to the First Cause of Action, “[t]he statute of limitations for breach of fiduciary duty is three years or four years, depending on whether the breach is fraudulent or nonfraudulent [Citations.]” (Am. Master Lease LLC v. Idanta Partners, Ltd. (2014) 225 Cal.App.4th 1451, 1479.) Where the gravamen of the cause of action for breach of fiduciary duty is deceit, the limitations period is three years under Code of Civil Procedure section 338(d), “rather than the catchall four-year limitations period that would otherwise apply.” (Fuller v. First Franklin Financial Corp. (2013) 216 Cal.App.4th 955, 963.)

As to the Second Cause of Action for California Financial Elder Abuse, Welfare & Institutions Code section 15657.7, provides that an action for damages for financial abuse of an elder or dependent adult, “shall be commenced within four years after the plaintiff discovers or, through the exercise of reasonable diligence, should have discovered, the facts constituting the financial abuse.”

Here, the Complaint alleges that Win Lin Yu, who is currently 96 years old and is not proficient in the English language, communicating exclusively in the Mandarin Chinese dialect, is the trustee of the Yu Family Trust which was formed in 2009. (Complaint, ¶¶ 1, 13.) The Complaint alleges that Yu was a conservative investor who mostly invested in Certificates of Deposit (“CDs”) at banking institutions, including East West Bank, and that Yu met Shen, a licensed financial adviser in 2012 or 2013 at the East West Bank branch office. (Complaint, ¶¶ 14-15.) The Complaint alleges that Shen and Yu communicated exclusively in Mandarin, and “Shen knew and understood that Yu did not speak, write, read, or understand the English language and that Yu was not capable of understanding investment characteristics presented to him in English.” (Complaint, ¶ 17.) The Complaint alleges that Shen “recommended that Yu discontinue investing in CDs and his amassed cash holdings and redeploy his irreplaceable retirements assets into investment products that Shen told Yu were as low risk, principal protected, and safe as CDs”; that “Shen having visibility to Yu’s conservative portfolio, and Shen’s ability to communicate with Yu in Mandarin organically established a trusted relationship indicative of a classic fiduciary relationship;” and that Shen made investment recommendations to Yu which Yu faithfully followed. (Complaint, ¶¶ 19, 20.)

The Complaint also alleges that Shen left East West Bank and associated with LPL beginning around June 30, 2014, transferring Shen’s accounts “to his stewardship at LPL,” and that in or around September 2014, Shen, an authorized agent of LPL, recommended to Yu a $500,000 investment in the [Northstar REIT],” conveying “that the Northstar REIT aligned with Yu’s conservative, FDIC-insured, principal protected, and risk-averse investment style.” (Complaint, ¶ 23.) The Complaint alleges that “[f]aithfully following Shen’s recommendation, the sum total of $500,000 was sent to LPL in September 2014 for the Northstar REIT investment.” (Complaint, ¶ 27.) The Complaint alleges that “Shen misrepresented to Yu that the Northstar REIT met his investment goals even though Shen knew that his statements were untrue, false, and/or misleading.” (Complaint, ¶ 29.) The Complaint additionally alleges that “Shen continued to make investment recommendations and manage Yu’s investment portfolio for many years and beyond May 2021,” and that “the ongoing relationship between Yu and Shen . . . accounts for the ongoing fiduciary duty and complete reliance on Shen after he disassociated with LPL, which applies the delayed discovery and tolling doctrine alleged below.” (Complaint, ¶ 31.)

The Complaint alleges that LPL is liable for all of Shen’s misconduct and omissions because Shen was LPL’s authorized agents and Shen’s acts were within the course and scope of his agency, as well as that LPL authorized, adopted and ratified Shen’s acts. (Complaint, ¶¶ 33-34.)

As to the statute of limitations, the Complaint alleges Plaintiff’s claims accrued in May 2021, as Plaintiff first became suspicious at this time when he received attorney advertising from a law firm, and when Yu was informed of another investment’s bankruptcy. (Complaint, ¶¶ 37, 41, 46.)

The Complaint additionally alleges the following, in relevant part:

“To the extent that Defendants contend that any claims based on their misconduct are barred by the statute of limitations, three legal doctrines delay the accrual of the claims: Defendants’ ongoing fiduciary duty; Defendants’ fraudulent concealment of their misconduct; and FINRA tolling rules.” (Complaint, ¶ 35.)

“Financial and investment advisors are fiduciaries to their customers in the State of California. The fiduciary duty is ongoing until the fiduciary relationship ends, and the accrual of claims can be tolled beyond the end of the fiduciary relationship if the customer is not aware of the misconduct.” (Complaint, ¶ 36.)

“Yu’s claims qualify for delayed discovery and tolling because Shen continued to serve as Yu’s trusted financial advisor beyond May 2021. May 2021 is the accrual date because it is when Yu was informed of another investment’s bankruptcy (the Hospitality REIT) and Yu first began to suspect that the investment portfolio designed, recommended, and managed by Shen did not match his conservative, risk averse investment style. Yu had no prior basis to suspect the intentional misconduct because Shen lied to Yu with believable, reasonable excuses for any investment setbacks. Shen’s fraudulent concealment to Yu is justified: Shen was communicating with Yu exclusively in Mandarin; Shen had Yu’s trust and confidence and was unduly influencing him; and Yu was incapable of independently evaluating Shen’s advice given his lack of proficiency with the English language and inexperience in these types of investments.” (Complaint, ¶ 37.)

The Complaint also alleges that “Defendants’ fraudulent concealment supports delayed discovery.” (Complaint, ¶ 44.) Moreover, the Complaint alleges that “Yu filed an arbitration claim against Defendants in the FINRA forum in July 2021. In January 2022, the FINRA arbitration panel issued a ruling that it did not have jurisdiction pursuant to FINRA Rule 12206,” and that FINRA Rule 12206(c) expressly provides for tolling of the claims while the FINRA claim was pending. (Complaint, ¶ 45.)

The Complaint notes that the Northstar REIT stopped paying dividends after a February 1, 2019 board meeting and thereafter suspended monthly distribution payments to stockholders, and that in December 2019, the Northstar REIT value dropped to $6.25 per share. (Complaint, ¶ 40.) The Complaint alleges that “February 2019 or December 2019 is not the accrual date because Shen lied to him about the reason for the suspension of dividends and value decline without admitting that the investment was not conservative and risk-averse. Shen concealed from Yu that the investment was not conservative or risk-averse and concealed from Yu that conservative and risk-averse investments do not perform like the Northstar REIT,” and that even if February 2019 is deemed the accrual, the claims are timely, as “[n]one of the claims are beyond the three years or four years statute of limitations for breach of fiduciary duty nor the four years limitations period for financial elder abuse when delayed discovery and tolling doctrines are applied.” (Complaint, ¶ 43.)

In sum, the Complaint alleges, “[a]ccrual of Yu’s claims accrued in May 2021 when Yu first suspected wrongdoing. His claims accrued, and he timely filed at FINRA and then timely in this court action. The claims were tolled when the FINRA claim was pending.” (Complaint, ¶ 46.)

Here, neither Plaintiff’s Statement of Claim, nor SEC filing submitted by LPL by way of LPL’s request for judicial notice are considered for the truth of the statements contained within these documents. Nor do these documents establish that Plaintiff was on placed on notice in 2016 of Plaintiff’s claims as it relates to the Northstar REIT.

Based on the allegations in the Complaint and the dates alleged, the Complaint does not show that either of Plaintiff’s claims is barred by any statute of limitations. Plaintiff alleges that Plaintiff first suspected wrongdoing in May 2021, and the instant Complaint was filed on March 14, 2022, well within the earlier three-year statute of limitations.

LPL makes no arguments concerning the allegations as to Northstar REIT and occurrences in 2019. To the extent that allegations that Northstar REIT stopped paying dividends after a February 1, 2019 board meeting and suspended monthly distribution payments to stock holders, and that in December 2019, the Northstar REIT value dropped to $6.25 per share are considered, a claim for breach of fiduciary based on fraud might be barred by the three-year statute of limitations, but LPL does not dispute that any claim was tolled during the FINRA arbitration proceeding, as alleged in the Complaint, such that Plaintiff’s claim would be timely.

LPL also does not address the allegations concerning delayed discovery and tolling based on the ongoing fiduciary relationship between Plaintiff and Shen, and Shen’s lies and concealment as to setbacks with the Northstar REIT investment.

Nevertheless, the Court notes that the Complaint alleges the time and manner of discovery, i.e., May 2021 when Plaintiff received attorney advertising from a law firm and was informed of another investment’s bankruptcy (Complaint, ¶¶ 37, 41), and the inability to have made earlier discovery despite reasonable diligence, i.e., Plaintiff’s lack of proficiency in the English language, exclusive communications in the Mandarin Chinese Dialect, reliance on and trust in Shen, and Shen’s lies to Plaintiff about the reason for the suspension of Northstar REIT dividends and value decline without admitting that the investment was not conservative and risk-averse, concealing the same, and that CDs do not have similar risks. (Complaint, ¶¶ 1, 13, 15, 17, 18, 40.) Thus, the Complaint sufficiently alleges facts to support the delayed discovery rule.

In sum, the running of any statute of limitations does not appear clearly and affirmatively from the dates alleged in the complaint, and to the extent a claim might be barred, this is insufficient to sustain a demurrer. Moreover, the Complaint alleges facts to support tolling and delayed discovery, along with an ongoing fiduciary duty. Accordingly, the Court OVERRULES LPL’s demurrer to the Complaint and each cause of the two causes of action therein.

Plaintiff’s Objections to Defendant’s Evidence

Declaration of Jeffrey Compton

Objection No. 1:  Overruled

Objection No. 2:  Overruled

Exhibits to LPL’s Request for Judicial Notice

Objection No. 3:  Overruled

Objection No. 4:  Overruled

LPL’s Request for Judicial Notice

LPL requests that the Court take judicial notice of two documents:  (1) the Statement of Claim filed by Plaintiff on July 30, 2021 with the Financial Industry Regulatory Authority (“FINRA”) (Ex. A); and (2) the Form 8-K dated July 1, 2016 filed by American Realty Capital Hospitality Trust, Inc. with the SEC on that same date (Ex. B).

A court may deny a request for judicial notice on the ground that the material is not relevant to the determination of the issues. (State Compensation Ins. Fund v. ReadyLink Healthcare, Inc. (2020) 50 Cal.App.5th 422, 442-443.)

Plaintiff’s Statement of Claim with FINRA does not support that any statute of limitations bars Plaintiff’s claims as it relates to the Northstar REIT and an SEC filing by American Realty Capital Hospitality Trust, Inc. has no direct relation to the Northstar REIT, such that it also does not show that any statute of limitations bars Plaintiff’s claims. Thus, the Court DENIES the request for judicial notice on the ground that the material is not relevant to the determination of the issues on demurrer.

Plaintiff’s Request for Judicial Notice

Plaintiff requests that the Court take judicial notice of the operative Complaint in this action filed on March 14, 2022, pursuant to Evidence Code section 452(d).

 “[W]hile courts are free to take judicial notice of the existence of each document in a court file, including the truth of results reached, they may not take judicial notice of the truth of hearsay statements in decisions and court files.” (Lockley v. Law Office of Cantrell, Green, Pekich, Cruz & McCort (2001) 91 Cal.App.4th 875, 882.) “Courts may not take judicial notice of allegations in affidavits, declarations and probation reports in court records because such matters are reasonably subject to dispute and therefore require formal proof.” (Ibid.)

The Court GRANTS Plaintiff’s request for judicial notice as to the Complaint pursuant to Evidence Code section 452(d), but declines to take judicial notice of the truth of hearsay statements therein.

Defendant to file an answer within 20 days.

Plaintiff to give notice.