Judge: Teresa A. Beaudet, Case: 22STCV27741, Date: 2023-05-24 Tentative Ruling

Case Number: 22STCV27741    Hearing Date: May 24, 2023    Dept: 50

Superior Court of California

County of Los Angeles

Department 50

Background

Plaintiff David Zaslow, a beneficiary of David Zaslow Accountancy Corporation Money Purchase Pension Plan (“Plaintiff”) filed this action on August 25, 2022 against Defendants Jeffrey H. Tamkin, Tamkin Development Corporation (“Tamkin Development”), and Crossett Development I, LLC (“Crossett”). The Complaint asserts causes of action for (1) fraud, (2) breach of contract, (3) breach of guaranty, (4) violation of Securities Exchange Act of 1934, (5) violation of Corporations Code sections 25110, 25130, and 25503, (6) violation of Corporations Code section 25504, and (7) violation of Corporations Code sections 25210 and 25501.5.[1]

Defendants Jeffrey Tamkin (“Tamkin”), Tamkin Development, and Crossett (collectively, “Defendants”) now demur to each of the causes of action of the Complaint. Plaintiff opposes.

Discussion

A.    Legal Standard

A demurrer can be used only to challenge defects that appear on the face of the pleading under attack or from matters outside the pleading that are judicially noticeable. (Blank v. Kirwan (1985) 39 Cal.3d 311, 318.) “To survive a demurrer, the complaint need only allege facts sufficient to state a cause of action; each evidentiary fact that might eventually form part of the plaintiff’s proof need not be alleged.” (C.A. v. William S. Hart Union High School Dist. (2012) 53 Cal.4th 861, 872.) For the purpose of testing the sufficiency of the cause of action, the demurrer admits the truth of all material facts properly pleaded. (Aubry v. Tri-City Hospital Dist. (1992) 2 Cal.4th 962, 966-967.) A demurrer “does not admit contentions, deductions or conclusions of fact or law.” (Daar v. Yellow Cab Co. (1967) 67 Cal.2d 695, 713.)

A pleading is uncertain if it is ambiguous or unintelligible. (Code Civ. Proc., § 430.10, subd. (f).) A demurrer for uncertainty may lie if the failure to label the parties and claims renders the complaint so confusing defendant cannot tell what he or she is supposed to respond to.  (Williams v. Beechnut Nutrition Corp. (1986) 185 Cal.App.3d 135, 139, fn. 2.) However, “[a] demurrer for uncertainty is strictly construed, even where a complaint is in some respects uncertain, because ambiguities can be clarified under modern discovery procedures.” (Khoury v. Maly's of California, Inc. (1993) 14 Cal.App.4th 612, 616.) 

B.    Allegations of the Complaint

In the Complaint, Plaintiff alleges that in or about November 2016, Tamkin solicited investments from Plaintiff in Tamkin Development. (Compl., ¶ 9.) Plaintiff alleges that Tamkin “is, and at all times relevant herein was, the President of Defendant Tamkin Development.” (Compl., ¶ 3.) Defendants represented to Plaintiff that the investment would be used for “public/private development and tax-exempt financing services.” (Compl., ¶ 9.) Defendants also represented that Plaintiff’s investment would be used for “leaseback” developments with governmental entities. (Compl., ¶ 10.)

Plaintiff agreed to loan $200,000 to Tamkin Development. (Compl., ¶ 12.) By and through a Promissory Note dated November 15, 2016 (“November 2016 Promissory Note”), Tamkin Development promised to repay the sum of Plaintiff’s $200,000 loan plus interest at a rate of 12% per annum, paid quarterly, on or before November 30, 2018. (Compl., ¶ 12.) Tamkin personally guaranteed payment of principal and interest under the November 2016 Promissory Note. (Compl., ¶ 12.)

Plaintiff then agreed to loan an additional $200,000 to Tamkin Development. (Compl.,    ¶ 14.) On or about June 21, 2017, Plaintiff and Tamkin Development executed a new Promissory Note (“June 2017 Promissory Note”), intended to replace the November 2016 Promissory Note. (Compl., ¶ 14.) Through the June 2017 Promissory Note, Tamkin Development promised to repay the sum of Plaintiff’s total $400,000 loan plus interest at a rate of 16% per annum, paid quarterly, on or before June 30, 2019. (Compl., ¶ 14.) Tamkin personally guaranteed payment of the principal and interest under the June 2017 Promissory Note. (Compl., ¶ 14.)

Plaintiff then agreed to loan an additional $200,000 to Tamkin Development. (Compl.,    ¶ 15.) On or about October 2, 2017, Plaintiff and Tamkin Development executed another Promissory Note (“October 2017 Promissory Note”). (Compl., ¶ 15.) Through the October 2017 Promissory Note, Tamkin Development promised to repay the sum of Plaintiff’s new $200,000 loan plus interest at a rate of 18% per annum, paid quarterly, on or before March 31, 2018. (Compl., ¶ 15.) Tamkin personally guaranteed payment of the $200,000 principal and all interest under the October 2017 Promissory Note. (Compl., ¶ 15.) Crossett also personally guaranteed payment of the $200,000 principal and all interest under the October 2017 Promissory Note. (Compl., ¶ 15.) Plaintiff alleges that Tamkin “is, and at all times relevant herein was, the Managing Member of Defendant Crossett Development.” (Compl., ¶ 5.)

Plaintiff also agreed to loan an additional $50,000 to Tamkin Development. (Compl.,      ¶ 17.) On or about April 1, 2018, Plaintiff and Tamkin Development executed a new Promissory Note (“April 2018 Promissory Note”) intended to replace the October 2017 Promissory Note and the June 2017 Promissory Note. (Compl., ¶ 17.) Through the April 2018 Promissory Note, Tamkin Development promised to repay the sum of Plaintiff’s total $650,000 loan plus interest paid monthly at a rate of 18% per annum on or before March 31, 2019. (Compl., ¶ 17.) Tamkin personally guaranteed payment of the $650,000 principal and all interest under the April 2018 Promissory Note. (Compl., ¶ 17.) Crossett also personally guaranteed payment of the $650,000 principal and all interest under the April 2018 Promissory Note. (Compl., ¶ 17.)

Plaintiff alleges that Tamkin Development failed to make all of the payments as required. (Compl., ¶¶ 19-23.) On or about March 16, 2020, Plaintiff offered three alternative payment plans to Tamkin, and on or about March 19, 2020, Tamkin sent the following email to Plaintiff, which states, inter alia, “[w]hile I appreciate your reasonable suggestions, unfortunately none of them are feasible…” (Compl., ¶¶ 25, 26.)

The Complaint alleges that “[i]n total, Plaintiff loaned $650,000 to…Tamkin Development…Additionally, Defendants owe $117,000 in interest on Plaintiff’s $650,000 loan. Defendants therefore owe Plaintiff at least $767,000.” (Compl., ¶ 27.)

C.    First Cause of Action for Fraud

“The elements of fraud, which give rise to the tort action for deceit, are (a) misrepresentation (false representation, concealment, or nondisclosure); (b) knowledge of falsity (or scienter); (c) intent to defraud, i.e., to induce reliance; (d) justifiable reliance; and (e) resulting damage.” (Lazar v. Superior Court (1996) 12 Cal.4th 631, 638 [internal quotations omitted].)

Defendants argue that the first cause of action for fraud must fail because there exists no actionable misrepresentation or justifiable reliance.

In support of the first cause of action, Plaintiff alleges that “Defendants made many false and misleading representations to Plaintiff, including, but not limited to: a. Defendants’ brochure and Investment Memo given to Plaintiff explaining leaseback development, including: ‘The project is financed with tax exempt municipal bonds and the title to the building is transferred to the public entity for $1.00 once the lease expires and the financing is paid off,’ ‘The investment is secured by a note with a 1-to-2-year maturity and personally secured by Mr. Tamkin. The note is paid off with program management and development fees received from the projects.” (Compl., ¶ 30(a).) Defendants argue that “[t]hese statements fail to establish any element of fraud. These statements are a general description of just one [sic] TDC’s investment strategies. They are not a promise or representation of future performance, which, even if they were, would still be insufficient to allege fraud as there is no allegation of an intent to deceive.” (Demurrer at p. 4:25-28.) But a “promise or representation of future performance” is not a necessary element of a fraud cause of action. In addition, as to intent, Plaintiff alleges that “Defendants made the above-mentioned misrepresentations with the purpose of inducing Plaintiff to make several loans to Defendant Tamkin Development.” (Compl., ¶ 32.)

Plaintiff also alleges that additional false and misleading representations made by Defendants to Plaintiff include: “Tamkin’s December 23, 2018, email to Plaintiff indicating that…Tamkin Development had another investment opportunity for Plaintiff at the same return he was then receiving for a term of one to three years,” “Tamkin’s September 12, 2019, email to Plaintiff indicating that Defendants would ‘catch up’ on all back and current interest by December 2019,” “Tamkin’s January 16, 2020, email to Plaintiff indicating that Defendants would catch up on all back and current interest by June 30, 2020,” and “Tamkin’s March 3, 2020, email to Plaintiff indicating that Tamkin Development was procuring ‘a substantial number of projects’ which would allow Defendants to catch up on owed interest and principal.” (Compl., ¶ 30(b)-(e).) Defendants argue that “nothing in the Emails can establish reliance by Plaintiff because they were made after the loans were funded.” (Demurrer at p. 5:13-14.)

Plaintiff does not respond to this point in the opposition. Indeed, Plaintiff alleges that his final loan was for $50,000 to Tamkin Development, and that “[o]n or about April 1, 2018, Plaintiff and Defendant Tamkin Development executed a new Promissory Note (‘April 2018 Promissory Note’) intended to replace the October 2017 Promissory Note and the June 2017 Promissory Note.” (Compl., ¶ 17.) The emails referenced in subsections (b)-(e) of paragraph 30 of the Complaint all follow the April 2018 Promissory Note. However, the Court notes that “¿a demurrer cannot rightfully be sustained to part of a cause of action or to a particular type of damage or remedy.¿” (¿Kong v. City of Hawaiian Gardens Redevelopment Agency (2002) 108 Cal.App.4th 1028, 1047¿; ¿see also PH II, Inc. v. Superior Court (1995) 33 Cal.App.4th 1680, 1682 [“A demurrer does not lie to a portion of a cause of action.”]¿.) “¿[W]hen a substantive defect is clear¿from the face of a complaint . . . a defendant may attack that portion of the cause of action by filing a motion to strike.¿” (PH II, Inc. v. Superior Ct., supra, ¿33 Cal.App.4th at pp. 1682-1683¿.)   

As to Crossett specifically, Defendants assert that “there are no allegations of fraud as to Crossett,” and that the subject emails are “alleged to have been sent only by Tamkin…” (Demurrer at p. 5:2; 5:10.) Indeed, each of the emails referenced in paragraph 30 of the Complaint are alleged to be “Tamkin’s” emails. (Compl., ¶ 30(b)-(e).) However, Plaintiff also alleges that “Defendants made many false and misleading representations to Plaintiff,” including but not limited to “Defendants’ brochure and Investment Memo given to Plaintiff.” (Compl.,     ¶¶ 30(a).) The Complaint does not allege that the brochure and Investment Memo belonged solely to Tamkin. In addition, Plaintiff alleges that Tamkin “is, and at all times relevant herein was, the Managing Member of Defendant Crossett Development.” (Compl., ¶ 5.) Plaintiff further alleges that each of the Defendants “were the agents, representatives, servants, employees, principals, joint-venturers, co-conspirators, and/or representatives of each of the remaining co-Defendants…” (Compl., ¶ 7.)

Based on the foregoing, the Court overrules the demurrer to the first cause of action.

D.    Second Cause of Action for Breach of Contract

Defendants argue that the second cause of action is uncertain against Tamkin Development.[2] Specifically, Defendants assert that “[a]fter first outlining in paragraphs 12-17 of the Complaint that Plaintiff loaned $650,000 to TDC through four successive promissory notes over two years, with each note replacing the prior, the second cause of action, in paragraphs 36-39, alleges breaches of each promissory note and seeks damages on account of all four of the notes. These allegations are contradictory and create ambiguity as to this cause of action.” (Demurrer at p. 5:19-24.)

As set forth above, Plaintiff alleges that “[o]n or about June 21, 2017, Plaintiff and Defendant Tamkin Development executed a new Promissory Note (“June 2017 Promissory Note”), intended to replace the November 2016 Promissory Note.” (Compl., ¶ 14.) Plaintiff also alleges that “[o]n or about April 1, 2018, Plaintiff and Defendant Tamkin Development executed a new Promissory Note (“April 2018 Promissory Note”) intended to replace the October 2017 Promissory Note and the June 2017 Promissory Note.” (Compl., ¶ 17.)

The Court agrees that the Complaint is ambiguous as to whether Plaintiff is alleging that Tamkin Development breached four separate promissory notes or only one (the April 2018 Promissory Note). As set forth above, Plaintiff alleges that the April 2018 Promissory Note was intended to replace the October 2017 and June 2017 Promissory Notes, and that the June 2017 Promissory Note was intended to replace the November 2016 Promissory Note.

Based on the foregoing, the Court sustains the demurrer to the second cause of action.

E.    Third Cause of Action for Breach of Guaranty

Defendants also argue that the third cause of action is uncertain against Tamkin and Crossett.[3] Specifically, Defendants argue that “[a]fter first outlining in paragraphs 12-17 of the Complaint that Tamkin guaranteed repayment of the loans made to TDC through four successive promissory notes over two years, with each guaranty replacing the prior, the third cause of action, in paragraphs 41-48, alleges breaches of each guaranty and seeks damages on account of all four of the guarantees. These allegations are contradictory and create ambiguity as to this cause of action.” (Demurrer at p. 6:5-10.)

For the reasons discussed above in connection with the second cause of action, the Court finds that the third cause of action is also ambiguous. The Court thus sustains the demurrer to the third cause of action.

F.     Fourth Cause of Action for Violation of Securities Exchange Act of 1934

In support of the fourth cause of action, Plaintiff alleges that “[t]he Promissory Notes were securities within the meaning of the Securities Exchange Act of 1934. Because the Notes were not registered with the Securities and Exchange Commission (‘SEC’), the securities must conform with the SEC Regulation D provisions…” (Compl., ¶ 50.) Plaintiff alleges that “Defendants failed to make adequate disclosures pursuant to Regulation D.” (Compl., ¶ 53.) Plaintiff also alleges that when Defendants issued the securities to Plaintiff, Defendants failed to request evidence that Plaintiff satisfied the requirements of a “qualified,” “sophisticated,” or “accredited” investor, as required. (Compl., ¶¶ 51, 52.)

Defendants argue that the fourth cause of action fails because a promissory note or personal guarantee does not constitute a security within Regulation D of the 1934 Securities and Exchange Act. Defendants cite to Amfac Mortg. Corp. v. Arizona Mall of Tempe, Inc. (9th Cir. 1978) 583 F.2d 426, 428, where the Ninth Circuit Court of Appeals found that “[t]he securities laws do not afford general relief when commercial loans turn out to have been unwisely made, nor are they a source of general federal jurisdiction. Arizona Mall of Tempe, Inc. (Arizona Mall) defaulted on a building loan agreement with Amfac Mortgage Corporation (Amfac). Amfac brought suit in Arizona state courts on the secured promissory note which had been given by Arizona Mall. Amfac then instituted this action in the federal district court in Arizona, arguing that the promissory note was a security within the meaning of the federal and Arizona securities laws. The district court dismissed all of Amfac’s securities claims for failure to state claims upon which relief may be granted…We affirm.” (Internal quotations and citations omitted.)

Plaintiff counters that in Amfac, the Ninth Circuit Court of Appeals also noted that “[w]hether the promissory note and other documents given to Amfac constituted securities within the meaning of the securities laws must be analyzed under this circuit’s risk capital test. Under this test the ultimate inquiry is whether Amfac contributed risk capital subject to the entrepreneurial or managerial efforts’ of (others). This approach encompasses the economic realities standard and the Howey test which have been utilized by the Supreme Court in United Housing Foundation, Inc. v. Forman, 421 U.S. 837, 95 S. Ct. 2051, 44 L. Ed. 2d 621 (1975).” (Amfac Mortg. Corp. v. Arizona Mall of Tempe, Inc., supra, 583 F.2d at pp. 431-432 [internal quotations and citations omitted.) The Amfac Court noted that “[s]ix factors were considered in Great Western And United California Bank to measure the risk involved to the lender. These are not exclusive, nor is any single one dispositive. The factors used were: (1) time, (2) collateralization, (3) form of the obligation, (4) circumstances of issuance, (5) relationship between the amount borrowed and the size of the borrower’s business, and (6) the contemplated use of the funds.” (Id. at p. 432.)

Plaintiff asserts that “[b]ecause a demurrer is not a procedure for determining the truth of disputed facts, nor is its purpose to speculate as to a plaintiff’s ability to support allegations at trial, Plaintiff is not required to perform the Howey test or the risk capital test in its Complaint.” (Opp’n at p. 5:25-27 [internal quotations omitted].) The Court finds that Defendants’ argument that the subject promissory notes here do not constitute “securities” involves factual issues not appropriate for demurrer.

Accordingly, the Court overrules the demurrer to the fourth cause of action. 

G.    Fifth and Sixth Causes of Action for Violation of Corporations Code Provisions 

Plaintiff’s fifth cause of action is for violation of Corporations Code sections 25110,

25130, and 25503. Plaintiff’s sixth cause of action is for violation of Corporations Code section 25504. The Corporate Securities Law of 1968 is set forth in Corporations Code section 25000,   et seq.

            In support of the fifth cause of action, Plaintiff alleges that the promissory notes were securities within the meaning of Corporations Code section 25019, and were not qualified under Corporations Code sections 25110 and 25130 as required. (Compl., ¶¶ 65, 67.) In support of the sixth cause of action, Plaintiff alleges that “Plaintiff suffered damages as a result of Defendants’ violations under Sections 25110, 25130, and 25503 of the Code, and Defendant Tamkin is liable for those damages pursuant to Section 25504 of the Code.” (Compl., ¶ 75.)

            Defendants asserts that the fifth and sixth causes of action fail because “Plaintiff’s notes do not evidence investments; rather, they are just loans with separate guarantees, which are typically not ‘securities.’” (Demurrer at p. 7:8-10.)[4] In support of this assertion, Defendants cite to People v. Black (2017) 8 Cal.App.5th 889, 892, where “Defendant Charles Baxter Black was charged with five counts of using false statements in the offer or sale of a security (Corp. Code, §§ 25401, 25540, subd. (b)) after he persuaded an acquaintance, Bronic Knarr, to invest in a real estate development opportunity in Idaho in return for a promissory note, the terms of which were amended and extended several times but never realized. The trial court set aside two of the counts pursuant to Penal Code section 995 based on a determination that the promissory note was not a security. The People appeal[ed] the order granting the motion to dismiss those two counts.” The Court of Appeal found that “the promissory notes offered for Knarr’s investment in the real estate development scheme were not securities within the meaning of the Corporate Securities Law of 1968 (Corp. Code, § 25000 et seq.).” (Ibid.)

            In People v. Black, the Court of Appeal noted that “Corporations Code section 25019 defines security by listing transactions and instruments deemed to be securities, including “any note; stock; … bond; … evidence of indebtedness; certificate of interest or participation in any profit-sharing agreement; … investment contract; … or, in general, any interest or instrument commonly known as a security…This list is expansive, but is not applied literally. Rather, the critical question … is whether a transaction falls within the regulatory purpose of the law regardless of whether it involves an instrument which comes within the literal language of the definition.” (People v. Black, supra, 8 Cal.App.5th at pp. 899-900 [internal quotations and citations omitted].) The Court found that “[i]t is generally accepted that both the risk-capital and federal [or Howey] tests may be applied, either separately or together; a transaction is a security if it satisfies either test.” (Id. at p. 900.) The Court further found that “[w]hether the promissory notes may be deemed securities presents a mixed question of law and fact…” (Id. at p. 899.)

The Court also finds that whether the subject promissory notes constitute “securities” within the meaning of the Corporate Securities Law of 1968 involves factual issues not appropriate for demurrer. 

            Thus, the Court overrules the demurrer to the fifth and sixth causes of action.

H.    Seventh Cause of Action for Violation of Corporations Code sections 25210 and 25501.5

In support of the seventh cause of action, Plaintiff alleges that Tamkin Development

“violated Section 25210 of the Code because it was not a licensed broker-dealer with the Financial Industry Regulatory Authority and upon information and belief, during the relevant time period, did not have a broker-dealer certificate under the Code or applicable federal law.” (Compl., ¶ 78.)

            Defendants argue that because Tamkin Development “only borrowed the money in its own name and for themselves, and never brokered a transaction between Plaintiff and any third party, the Seventh Cause of Action is subject to demurrer.” (Demurrer at p. 7:28-8:2.)

            Corporations Code section 25210, subdivision (a) provides, “[u]nless exempted under the provisions of Chapter 1 (commencing with Section 25200) of this part, no broker–dealer shall effect any transaction in, or induce or attempt to induce the purchase or sale of, any security in this state unless the broker–dealer has first applied for and secured from the commissioner a certificate, then in effect, authorizing that person to act in that capacity.” (Corp. Code, § 25210, subd. (a).) Corporations Code section 25004 provides that “‘Broker-dealer’ means any person engaged in the business of effecting transactions in securities in this state for the account of others or for that person’s own account. ‘Broker-dealer’ also includes a person engaged in the regular business of issuing or guaranteeing options with regard to securities not of that person’s own issue.” (Corp. Code, § 25004, subd. (a).) Corporations Code section 25004, subdivision (a)(4) provides that a “‘Broker-dealer’ does not include any of the following:…Any person insofar as that person buys or sells securities for that person’s own account, either individually or in some fiduciary capacity, but not as part of a regular business.” Defendants argue that “a company papering its own loan does not require it to be a licensed brokerdealer.” (Demurrer at  p. 8:3-4.)

            In the opposition, Plaintiff asserts that Tamkin Development does engage in business and buys and sells securities for its own account as part of a regular business, such that Corporations Code section 25004, subdivision (a)(4) does not apply. In the Complaint, Plaintiff alleges that “Tamkin Development was a broker-dealer within the meaning of the Code Section 25004 because Defendant Tamkin Development was engaged in the business of effecting transactions in securities in the State of California for its own account and/or for the account of Plaintiff.” (Compl., ¶ 77.) However, Plaintiff does not appear to specifically allege that Tamkin Development did so “as part of a regular business.” (Corp. Code, § 25004, subd. (a)(4).)

            Thus, the Court sustains Defendants’ demurrer to the seventh cause of action.

Conclusion

For the foregoing reasons, the Court sustains Defendants’ demurrer to the second, third, and seventh causes of action, with leave to amend. The Court overrules Defendants’ demurrer to the fourth, fifth, and sixth causes of action.

The Court orders Plaintiff to file and serve an amended complaint, if any, within 20 days of the date of this Order. If no amended complaint is filed within 20 days of this Order, Defendants are ordered to file and serve their answers within 30 days of the date of this Order.¿ 

Defendants are ordered to give notice of this Order.¿ 

DATED:  May 24, 2023                                 ________________________________

Hon. Teresa A. Beaudet

Judge, Los Angeles Superior Court