Opinion
B328415 B333624
04-29-2024
HAVEN OF PEACE FILMS, LLC., Plaintiff and Respondent, v. ECOM ASSET SECURITIZATION, INC., et al., Defendants and Appellants. HAVEN OF PEACE FILMS, LLC., Plaintiff and Respondent, v. ECOM MORTGAGE LLC, et al., Defendants and Appellants.
Thomas Ogden for Defendants and Appellants. Law Office of Howard Goodman and Howard Goodman for Plaintiff and Respondent.
NOT TO BE PUBLISHED
APPEALS from the judgment and an order of the Superior Court of Los Angeles County, Super. Ct. No. 21AHCV00023 Joel L. Lofton, Judge. Affirmed.
Thomas Ogden for Defendants and Appellants.
Law Office of Howard Goodman and Howard Goodman for Plaintiff and Respondent.
ROTHSCHILD, P. J.
In appeal No. B328415, defendants and appellants William Chen and his company Ecom Asset Securitization, Inc. (Ecom), appeal from a judgment against them and in favor of plaintiff and respondent Haven of Peace Films LLC (Haven). The judgment followed a bench trial on Haven's claims against Ecom, Chen, and two other defendants not ultimately held liable, Minzhin Zhu aka Jenny Zhu and Ecom Mortgage LLC (Ecom Mortgage). The trial court concluded Ecom and Chen had intentionally defrauded Haven in connection with an investment between Ecom and Haven and awarded Haven approximately $1.5 million in compensatory damages on that basis. Ecom and Chen challenge the judgment based primarily on arguments that (1) Haven did not and cannot prove the justifiable reliance element of its fraud claim, and (2) the evidence did not support the court's finding that Haven paid Ecom $2 million in connection with the agreement. The trial court did not err in its assessment of the fraud claim, and substantial evidence supports the challenged factual finding. Accordingly, we affirm the judgment.
In appeal No. B333624, defendants and appellants Zhu and Ecom Mortgage appeal from a postjudgment order that, as a means of satisfying the judgment against Ecom and Chen, assigned to Haven Chen's right to earnings from Ecom Mortgage. The order also appointed a receiver to collect such earnings. Ecom Mortgage and Zhu argue that, under Corporations Code section 17708.09, Haven is an unregistered Nevada company that lacked capacity both to file the underlying lawsuit and to seek a receivership. But the burden was on Zhu and Ecom Mortgage below to prove that Haven was in violation of this section, and substantial evidence supports the trial court's finding, implicit in its rejection of this argument below, that they did not meet this burden. Moreover, Zhu and Ecom Mortgage forfeited this argument by failing to timely pursue it during the underlying litigation, to which they were parties and in which they participated through shared counsel with Chen and Ecom. Accordingly, we affirm the order as well.
Unless otherwise indicated, all further statutory references are to the Corporations Code.
FACTS AND PROCEEDINGS BELOW
A. Haven and Ecom's Investment Agreement
In 2018, Hong Tao, now deceased, was the sole owner of Haven, a Nevada limited liability company. Hong died before trial, and the court admitted her deposition testimony. According to this testimony, Hong was an actress and sought the assistance of Chen to help her find funding to make a film. Hong "convince[d]" her that a certain "financial product . . . [could] make [her] double return in four months," and she agreed to invest therein.
Elsewhere in the record, Hong Tao is referred to as "Jennifer Hong." For the sake of clarity, we shall refer to her as "Hong."
Chen testified at trial that the "investment opportunity" he proposed to Hong had been brought to him by Sherman Mazur, not a party to this action. Mazur told Chen this opportunity could yield up to $6 million in returns within a few months of investing $300,000. On June 14, 2018, Ecom, through Chen, entered into an agreement with Mazur's company to invest $300,000 with Mazur, even though Chen did not have sufficient funds for such an investment.
Chen ultimately used money he obtained from Hong/Haven to pay Mazur. Chen obtained this money via an agreement between Ecom and Haven, which is the subject of the instant litigation. Chen drafted this agreement by "cop[ying]" the language in his agreement with Mazur and only "chang[ing] the name[s] [and] amount." The result was a July 18, 2018 "participation agreement" (boldface, full capitalization &underscoring omitted), signed by Hong in her capacity as Haven's "President" and Chen as Ecom's "Member/Director" (the investment agreement).
B. The Investment Agreement
Under the investment agreement, Haven "agreed to participate" in "the participating transaction" "on a profit[-]sharing basis" by paying Ecom $2 million in exchange for the "rights to profits" from the transaction "in an amount not to exceed four million dollars ($4,000,000)." (Capitalization omitted.) Another section of the agreement "entitled" Haven to $4 million in "distributions"-not merely a maximum of that amount-"immediately upon receipt of any distributions" from the transaction.
The agreement contains representations by Haven that Haven is an" 'accredited investor' or 'qualified institutional buyer' under [securities laws]" (capitalization omitted), and that the investment Haven was making by signing the agreement involved "substantial risks" Haven was capable of evaluating and understanding.
C. Hong's Payments Under the Investment Agreement
Two separate provisions in the agreement attest to Haven having paid Ecom $2 million as of the date the parties signed the agreement. The initial recitals provide that "[Ecom] has determined that it is in its best interest to sell to [Haven] an interest in the participating transaction for total aggregate consideration of two million dollars ($2,000,000), receipt of which is hereby acknowledged." (Capitalization omitted.) Article I, section 1.2, captioned "purchase price," further states that "[Haven] has paid the purchase price in the form of a cash payment of two million dollars ($2,000,000)." (Capitalization omitted.) It was undisputed at trial that Hong wired Ecom $570,000. Hong testified that she borrowed the remaining $1.43 million from friends and gave it to Chen in cash. She understood the investment agreement to be proof of this cash payment.
In July 2018, Hong also obtained a $1 million loan, secured by a deed of trust on her residence, to pay back the friends from whom she had borrowed money. Hong obtained this loan working with Chen's wife, Zhu, and Ecom Mortgage, a company of which Zhu testified she was chief executive officer.
Chen denied that he or Ecom ever received any payments from Hong or Haven other than the $570,000 wired to Ecom. He testified that he did not understand the investment agreement, as English was not his first language, although he acknowledged that he had added the $2 million amount to the document when preparing it.
D. Lack of Return on Investment Under Agreement
Chen invested only $300,000 of the money he received from Hong with Mazur. In approximately November 2018, approximately four months later, Chen still had not received any distributions from this investment, and had not provided Haven any return on its investment either. In response to Hong's concerns about this, Chen wrote a $4 million check from Ecom to Haven, but instructed Hong not to cash it until they received distributions from the investment. Chen also offered to make the interest payments on the loan Hong had taken "to help her," and made all such payments on the loan for approximately four years, stopping only when Haven filed suit against him. It was undisputed at trial that the total amount of these payments was approximately $289,900.
Chen never received any distributions from his investment with Mazur, and later learned Mazur had been arrested in connection with the purported investment opportunities he was offering. Chen also did not pay anything to Hong or Haven pursuant to the investment agreement between Ecom and Haven.
E. The Instant Lawsuit
Haven, through Hong, sued Chen, Ecom, Ecom Mortgage, and Zhu for breach of contract, money had and received, and fraud on theories of both intentional or negligent misrepresentation. Under the operative complaint, Haven sought $2 million in compensatory damages and $100,000 in punitive damages based on malice, fraud, and oppression. The operative complaint identifies as the misrepresentations on which the fraud cause of action is based that "[d]efendants represented to plaintiff that if plaintiff invested $2 million that plaintiff would realize returns in the sum of $4 million" although "[d]efendants never intended to use the $2 million for an actual investment and never intended to return plaintiff's funds or to furnish to plaintiff any profits or returns on an investment. Defendants converted the funds for their own personal use." As a basis for punitive damages, the operative complaint identifies these same facts, adding, inter alia, that "[t]o persuade plaintiff that [plaintiff's] investment was authentic and that profits were a certainty and that there was no risk, defendants furnished to plaintiff a check for $4 million[,]" and that "[d]efendants did not possess a series 6 securities license and were unlicensed and were prohibited from trading in the financial instruments described in [the investment agreement]. The investment was itself bogus and illegal."
Following a brief bench trial on January 31, 2023, the court found that Haven had "shown by a preponderance of the evidence that the defendants negligently and fraudulently made misrepresentations which resulted in [Haven/Hong's] financial harm." (Capitalization omitted.) The court found that Chen/Ecom had "received a total of $2,000,000 from [Haven,]" but that Chen only ever intended to-and only ever did-invest $300,000 of that money with Mazur, "retain[ing] the balance for himself." The court entered judgment on behalf of Haven and against Chen and Ecom (but not against Ecom Mortgage or Zhu) "in a total amount of $2,000,000 minus the $300,000 that was paid to Mazur and offset by $289,000 that was remitted by way of mortgage interest payments for a total of $1,411,000 [plus] interest" beginning the date of the investment agreement. The court did not award exemplary damages.
Chen and Ecom timely appealed (appeal No. B328415) (the judgment appeal).
F. Postjudgment Assignment and Receivership
In July 2023, Haven moved for an order assigning Chen's right to payment of earnings from Ecom Mortgage, and further for "appointment of a receiver to enforce the assignment order and to collect those earnings" (the receivership motion). In opposing the motion, Zhu and Ecom Mortgage argued that Haven was a foreign limited liability company not authorized to conduct intrastate business in California, and thus lacked capacity to seek this relief. To support this contention, Zhu and Ecom Mortgage offered the declaration of their counsel attesting to his having "search[ed] the California Secretary of State's website . . . [for] 'Haven of Peace Films,' and several variations," and that "[t]he California Secretary of State has no business record in its database of such entity or any other entity that might be the plaintiff in this matter." (Capitalization omitted.)
The court granted Haven's motion, assigning to Haven any right Chen might have to a salary from Ecom Mortgage/Zhu and appointing a third party receiver to enforce this assignment. In appeal No. B333624 (the receivership appeal) Zhu and Ecom Mortgage appealed the order granting the motion, which we shall refer to as "the receivership order."
DISCUSSION
A. The Judgment Appeal (appeal No. B328415)
In the judgment appeal, Chen and Ecom contend:
(1) "The [investment agreement] was legal [because it] involv[ed] a private placement by an issuer selling its own securities to an 'accredited investor'" (boldface omitted); (2) the evidence does not support the court's factual finding that Haven/Hong gave Ecom/Chen the full $2 million referenced in the investment agreement; and (3) the evidence does not support the requisite reasonable reliance element of Haven's fraud claim.
Chen and Ecom do not explicitly raise this as an argument on appeal, but strongly intimate it in the factual summary of their brief. Haven's brief characterizes Chen and Ecom's argument as including an argument challenging the sufficiency of the evidence to support $2 million in payments. On reply, Chen and Ecom do not disclaim having made such an argument. Giving them the benefit of the doubt, we address the issue.
1. Chen and Ecom's argument that the investment agreement is not illegal is irrelevant
As to the first argument, Chen and Ecom appear to be responding to arguments in Haven's briefing below, which challenged the legality of the investment agreement under securities laws and cited this as a basis for seeking punitive damages. But the court did not award punitive damages, and the illegality of the investment agreement is not an element of Haven's fraud claim. Nor did the court make any explicit or implicit findings in this regard in concluding Haven had established the elements of her fraud claim. Whether or not the agreement complies with securities law is thus not relevant to whether the court erred in ruling that Haven had established intentional fraud.
2. Substantial evidence supports the court's finding that Haven/Hong paid Ecom/Chen $2 million
We review factual findings for substantial evidence, a review that" 'begins and ends with a determination as to whether there is any substantial evidence, contradicted or uncontradicted, which supports the conclusion reached, disregarding any evidence in the record contrary to the trier's finding. [Citations.]'" (Peradotto v. State Personnel Board (1972) 25 Cal.App.3d 30, 33.) Here, the investment agreement alone is substantial evidence that Haven paid Ecom $2 million, because it contains an attestation to this effect that Chen signed as an officer of Ecom. Although Chen claimed at trial not to have known the agreement contained such an attestation, one who signs a document is presumed to know its contents "and cannot complain of unfamiliarity with the language of the instrument." (Madden v. Kaiser Foundation Hospitals (1976) 17 Cal.3d 699, 710; accord, Stewart v. Preston Pipeline Inc. (2005) 134 Cal.App.4th 1565, 1588-1589.) Even where there is a language barrier, it is the responsibility of a contracting party to understand what he or she is signing. (Randas v. YMCA of Metropolitan Los Angeles (1993) 17 Cal.App.4th 158, 163 [" '[i]f [the contracting party] cannot read [English], he should have it read or explained to him' "], quoting 1 Witkin, Summary of Cal. Law (9th ed. 1987) § 120, p. 145.)
Although Chen testified and denied receiving $2 million "[i]f there is conflicting testimony, we must accept the [trier of fact's] resolution of disputed facts and inferences, . . . and the version of events most favorable to the [judgment], to the extent the record supports them." (People v. Zamudio (2008) 43 Cal.4th 327, 342.) Here, the court's finding that Hong/Haven made the full $2 million payment reflects a decision by the trial court to credit Hong's version of events rather than Chen's. There is nothing "so inherently implausible about [Hong's testimony]"- particularly in light of the representations in the agreement Chen signed-"to justify disregarding [the court's credibility determination] under the substantial evidence rule." (Fortman v. Hemco, Inc. (1989) 211 Cal.App.3d 241, 254.) Thus, substantial evidence supports the court's finding that Hong paid Chen/Ecom a total of $2 million.
3. The court did not err in ruling in Haven's favor on Haven's fraud claim
The court found in favor of Haven on a single cause of action and theory: fraud via intentional misrepresentation. The elements of such a claim 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." '" (Small v. Fritz Companies, Inc. (2003) 30 Cal.4th 167, 173.) Chen and Ecom contend that substantial evidence does not support "justifiable reliance." (Ibid.) Specifically, they argue that Haven could not have justifiably relied on assurances by Chen that, without taking on any financial risk, Haven could turn a $2 million dollar investment into $4 million dollars in a few months-particularly given the representations in the investment agreement that Haven was a sophisticated "accredited investor" capable of understanding the substantial financial risk at hand. But the court did not conclude that Haven had established a claim for fraud based on Chen intentionally misrepresenting the level of risk or potential reward from the investment. Rather, the court concluded that Chen and Ecom had intentionally misrepresented that Chen would invest the full $2 million dollars. By Chen's own testimony, he never intended to do this, nor did he ever do it. On appeal, Chen and Ecom do not challenge the sufficiency of the evidence to support the finding that Chen intentionally misrepresented his intent to invest the full amount Haven paid Chen/Ecom. Ecom and Chen do not argue that, in deciding to enter into the agreement with Ecom, Haven/Hong could not reasonably rely on Chen's oral and written representations that Ecom would invest (or cause to be invested) the money received from Haven/Hong. Nor could they so argue. Investing $2 million in the hopes of seeing substantial returns is a vastly different proposition than is paying Ecom and Chen $1.7 million in exchange for Ecom's efforts investing $300,000. Haven understood it was investing $2 million dollars-indeed, this was the entire point of the investment agreement. Substantial evidence supports that Haven would not have pursued the investment at all, had it known the truth.
Chen and Ecom argue that the court could not have ruled on such a theory because, when the court asked at the outset of trial for clarification as to whether this was Haven's fraud theory, Haven's trial counsel responded, "[n]ot really." But this comment from counsel does not restrict the trial court from concluding the evidence supported that a fraud of this nature occurred. Moreover, Haven's trial counsel stated later in the same colloquy that Haven's theory could potentially evolve to conform to proof. Finally, the court made clear during these discussions that, although the court would consider the evidence presented, based on the briefing, a misrepresentation that Ecom would in fact invest the funds received was the only basis for a viable theory of fraud the court could identify, and the court would not likely accept "the fraud [theory] that . . . plaintiff invested [two] million and was supposed to get [four] million in four months . . . no reasonable person would believe that that's true." Later, the court reiterated: "So you understand for the fraud, it has to be reasonable. We have to reasonably rely. So the get rich quick, no risk, doesn't appear to be reasonable." It thus does not, as Ecom and Chen suggest, "def[y] fairness" for the court to have ruled based on the only theory of fraud the court had identified as potentially viable.
Because substantial evidence supports that this intentional misrepresentation induced Haven to enter into the investment agreement, damages still flowed from such reliance in the amount awarded by the trial court-an amount that effectively refunded to Haven the portion of the money that was not invested as Chen represented it would be. It is thus not a bar to Haven collecting damages that, had Chen and Ecom invested the entire $2 million with Mazur as Chen represented he would, Haven would have been no better off. In any event, Chen and Ecom do not raise any appellate challenge to the amount of damages awarded, nor to the sufficiency of the evidence to support the damages element of the fraud claim.
The record thus supports all elements of a fraud claim based on Chen/Ecom's intentional misrepresentations that Ecom would invest the money received from Haven/Hong.
Because we conclude the court did not err in finding for Haven on a theory of fraud based on intentional misrepresentation, we need not consider Ecom and Chen's argument that Haven failed to sufficiently prove a negligent misrepresentation cause of action. Nor need we consider their argument that the court could not rule in Haven's favor on a concealment theory of fraud, which was not pleaded in the operative complaint, because we disagree with their characterization of the court's ruling as based on a concealment theory.
Accordingly, Chen and Ecom have failed to identify any error in the judgment.
B. The Receivership Appeal (appeal No. B333624)
In the receivership appeal, Zhu and Ecom Mortgage challenge the receivership order. They argue that, under section 17708.07, Haven lacked the capacity to seek both the judgment the receivership order was based on and the receivership order itself.
Section 17708.07 provides that "[a] foreign limited liability company transacting intrastate business in this state shall not maintain an action or proceeding in this state unless it has a certificate of registration to transact intrastate business in this state." (§ 17708.07, subd. (a).) "The failure of a foreign [company] to qualify to transact business prior to commencing an action is a matter of abatement of the action. (O'Connell Gold Mines, Ltd. v. Baker (1944) 63 Cal.App.2d 384, 389-390 . . . .) Once a nonqualified foreign [company] commences an action regarding intrastate business, the defendant may assert by demurrer or as an affirmative defense in the answer the lack of capacity to maintain an action arising out of intrastate business. (Id. at p. 390.) This abatement procedure enables the foreign [company] to obtain a judicial determination as to whether it is in fact transacting intrastate business." (United Medical Management Ltd. v. Gatto (1996) 49 Cal.App.4th 1732, 1740, italics omitted [addressing parallel requirements for foreign corporations]; see Thorner v. Selective Cam Transmission Co. (1960) 180 Cal.App.2d 89, 90 (Thorner).)
Zhu and Ecom Mortgage generally raised the issue of Haven's incapacity to sue-albeit without identifying the basis for such incapacity-by including the following language in the joint answer filed by counsel for all four defendants (Zhu, Ecom Mortgage, Chen, and Ecom): "Lack of capacity to sue. This answering defendant(s) is informed and believes, and thereon alleges at all relevant times herein, that one or more plaintiff(s) named herein lacks the legal capacity to sue." (Boldface, capitalization &underscoring omitted.) Neither Zhu nor Ecom Mortgage, nor any other defendant, attempted to establish such lack of capacity at trial or at any point before the court entered judgment. They did not raise section 17708.07 at any time before or during trial, nor did they seek a bifurcated trial, through which the court could have first determined Haven's capacity to sue before reaching the merits of Haven's claims. (See Code Civ. Proc., § 597 ["[w]hen the answer . . . sets up any . . . defense not involving the merits of the plaintiff's cause of action but constituting a bar or ground of abatement to the prosecution thereof, the court may, either upon its own motion or upon the motion of any party, proceed to the trial of the special defense or defenses before the trial of any other issue in the case, and if the decision of the court . . . upon any special defense so tried . . . is in favor of the defendant pleading the same, judgment for the defendant shall thereupon be entered and no trial of other issues in the action shall be had"].) Zhu and Ecom Mortgage have thus arguably forfeited the argument, and likely were precluded from using it as a basis for challenging the receivership order. (See Kabran, supra, 2 Cal.5th at p. 342.)
Although Zhu and Ecom Mortgage claim to be "strangers to the judgment," they were in fact named defendants in the lawsuit resulting in that judgment, even if they were not found liable. This is thus not a basis on which they can claim not to have forfeited the issue. Nor do they cite any valid authority for the argument that section 17708.07's mandatory language renders it jurisdictional, and thus that their argument about noncompliance with the statute cannot be forfeited. "[J]urisdictional rules are mandatory, but mandatory rules are not necessarily jurisdictional. Noncompliance with a mandatory rule can result in invalidation of the action so long as the noncompliance is properly raised; a party can forfeit its challenge to the noncompliance by failing to object." (Kabran v. Sharp Memorial Hospital (2017) 2 Cal.5th 330, 342 (Kabran).) Section 17708.07 addresses capacity to sue, and "lack of capacity is not a jurisdictional defect" that can render a judgment void. (Tabarrejo v. Superior Court (2014) 232 Cal.App.4th 849, 863.)
We need not resolve this issue, however, because even if Zhu and Ecom Mortgage have not forfeited this argument, it does not provide a basis for the relief they seek on appeal. Zhu and Ecom Mortgage bore the burden of establishing that section 17708.07 provided a basis for denying the receivership motion. (See Automotriz etc. De California v. Resnick (1957) 47 Cal.2d 792, 794 ["[t]he burden of proving that [parallel statute addressing foreign corporations] precludes maintenance of an action is upon the party pleading the bar of the statute"]; accord, Thorner, supra, 180 Cal.App.2d at p. 90.) When the court granted the motion despite Zhu and Ecom Mortgage's opposition on this basis, the court necessarily made implicit findings that they had not met this burden-that is, that they had not proven Haven was a foreign limited liability company transacting intrastate business at the time it filed the underlying lawsuit and/or filed the receivership motion. In an appeal from such a lower court ruling that the appealing party has failed to carry its burden of proof below, we consider whether the evidence compels a finding in the appellant's favor as a matter of law. (See Dreyer's Grand Ice Cream, Inc. v. County of Kern (2013) 218 Cal.App.4th 828, 838 [" 'where the issue on appeal turns on a failure of proof at trial, the question for a reviewing court becomes whether the evidence compels a finding in favor of the appellant as a matter of law' "].) Under this formulation of substantial evidence review, the question" 'becomes whether the appellant's evidence was (1) "uncontradicted and unimpeached" and (2) "of such a character and weight as to leave no room for a judicial determination that it was insufficient to support a finding"' "-here, a finding of that Haven was a nonregistered foreign company transacting intrastate business in California. (Sonic Manufacturing Technologies, Inc. v. AAE Systems, Inc. (2011) 196 Cal.App.4th 456, 466.)
The only evidence Zhu and Ecom Mortgage offered to support such a finding (and thus the applicability of section 17708.07) was the counsel declaration stating that Haven was a Nevada company that was not and had never been registered with the California Secretary of State. But Zhu and Ecom Mortgage offered no evidence to support that Haven had transacted intrastate business by entering into the investment agreement with Haven (or through any other conduct)-let alone evidence that would compel us to conclude that Haven had done so.
DISPOSITION
The judgment and order are affirmed. Haven is awarded its costs on appeal.
We concur: BENDIX, J. WEINGART, J.