Opinion
H025327.
11-21-2003
VINOD SAHNI, et al., Plaintiffs and Appellants, v. GARRY BANKS, et al., Defendants and Respondents.
Plaintiff Vinod Sahni appeals from an order dismissing his second amended complaint without leave to amend on grounds that it was barred by principles of res judicata embodied in the compulsory cross-complaint statute. (Code Civ. Proc., § 426.30.) He contends that an action for declaratory relief is not subject to demurrer, that his claim was not ripe at the time the cross-complaint was filed, and that res judicata does not apply in the circumstances of this case. We affirm the judgment of dismissal.
Suit was brought by Sahni individually and in the name of several business enterprises. We will refer to plaintiffs collectively as Sahni.
This is a nonappealable order. However, we will treat it as an appeal from the subsequent judgment of dismissal. (Groves v. Peterson (2002) 100 Cal.App.4th 659, 666, fn. 2.)
All further unspecified statutory references are to the Code of Civil Procedure.
BACKGROUND
We take the facts from the pleadings and from matters judicially noticed by the trial court.
In May of 1998, Sahni purchased a business known as C & G Precision, a machine shop, from Garry and Carol Banks (hereafter, Banks) for the sum of $800,000. Banks carried back a promissory note in the amount of $450,000, secured by personal property of the business. At the same time, Sahni purchased from Banks Unit 32, an industrial condominium where the machine shop was located, for the price of $280,000. Banks carried back a promissory note and second deed of trust on Unit 32 in the amount of $110,000.
After Sahni took over the business he immediately experienced severe cash flow problems and was unable to make the payments on the promissory notes.
In June of 1999, Banks commenced non-judicial foreclosure proceedings on the second deed of trust on Unit 32, and also filed a separate civil action seeking money owed on the $450,000 promissory note and recovery of the collateral. (C & G Precision, Inc. v. Sahni (Super. Ct. Santa Clara County, 1999, No. CV782903).) In July of 1999, Sahni answered and cross-complained against Banks for fraud in misrepresenting the income of the business. The foreclosure on Unit 32 was completed in November of 1999, and Banks took over ownership of the property. On December 8, 1999, case No. CV782903 was ordered to arbitration.
The arbitrator found in favor of Sahni, and on March 16, 2001, an order was entered granting a motion to confirm the arbitration award in case No. CV782903. Judgment was entered ordering that the promissory note for $450,000 from Sahni to Banks was cancelled, that Sahni owed Banks nothing on that note, that Sahni retained the business and all of its assets and liabilities, and that Banks owed Sahni attorneys fees.
On July 12, 2001, Sahnis attorney wrote to Banks, stating his position that the foreclosure on Unit 32 was the direct result of Bankss misrepresentations as to the cash flow of the business. Accordingly Sahni considered himself the " `owner-in-fact "of Unit 32. On November 12, 2001, Banks notified Sahni that the monthly rent on Unit 32 would be increased from $1700 to $ 3900 as of January 1, 2002.
Sahni filed this action against Banks on December 12, 2001. It contained causes of action for fraud, for cancellation of the trustees deed by which Banks reacquired Unit 32 at the foreclosure sale, for a constructive trust, and for declaratory relief. The cause of action to cancel the trustees deed was based upon allegations of Bankss fraud and deceit in making misrepresentations about the income of the business, which resulted in Sahni defaulting on the loan securing Unit 32.
Demurrers were sustained twice with leave to amend. The basis for the demurrers was that the asserted fraud had been fully adjudicated in case No. CV782903, and that the present action was based on the same series of events or transactions. It was thus barred by the provisions of section 426.30, subdivision (a). That section provides that "[i]f a party against whom a complaint has been filed and served fails to allege in a cross-complaint any related cause of action which (at the time of serving his answer to the complaint) he has against the plaintiff, such party may not thereafter in any other action assert against the plaintiff the related cause of action not pleaded."
Sahnis second amended complaint deleted all causes of action except that for declaratory relief. The second amended complaint alleged that an actual controversy existed in that both parties claimed ownership of Unit 32. In support of his claim of ownership, Sahni alleged that the foreclosure sale that had occurred in 1999 was the result of fraud and misrepresentation and therefore that the trustees deed was voidable.
Bankss demurrer to the second amended complaint was sustained without leave to amend. In a written order, the court found that "Plaintiffs failed to cure the defects in the prior pleading. It is clear that plaintiffs tried to plead around their formerly defective claims by paring down the specificity of the allegations in the complaint. The practice of omitting facts that admittedly exist, however, is improper. The record reflects that plaintiffs action for declaratory relief is premised upon the same allegations contained in the prior pleading, and this Court already found that those allegations support the conclusion that this action is barred by res judicata."
ISSUES
Standard of Review
On appeal from a judgment of dismissal following the sustaining of a demurrer without leave to amend, we accept as true all facts properly pleaded, evidentiary facts found in exhibits attached to the complaint, and facts that may be implied or inferred from those expressly alleged. (Morillion v. Royal Packing Co. (2000) 22 Cal.4th 575, 579; Satten v. Webb (2002) 99 Cal.App.4th 365, 375; Marshall v. Gibson, Dunn & Crutcher (1995) 37 Cal.App.4th 1397, 1403.) Relevant matters that were properly the subject of judicial notice may be treated as having been pled. (Marina Tenants Assn. v. Deauville Marina Development Co. (1986) 181 Cal.App.3d 122, 128.) Our task is to determine whether the complaint states a cause of action on any legal theory. (AL Holding Co. v. OBrien & Hicks, Inc. (1999) 75 Cal.App.4th 1310, 1312.) If there is a reasonable possibility that a complaint can be amended to state a cause of action, the trial court abuses its discretion in failing to grant leave to amend. (Zelig v. County of Los Angeles (2002) 27 Cal.4th 1112, 1126.) Appellant bears the burden of demonstrating abuse of discretion by showing how the complaint can be amended to state a cause of action. (Hendy v. Losse (1991) 54 Cal.3d 723.)
The Compulsory Cross-Complaint Statute
The compulsory cross-complaint statute embodies an aspect of the doctrine of res judicata. It serves the ends of judicial efficiency by requiring parties to litigate all conflicting claims between them that arise out of the same transaction in one single action. (Flickinger v. Swedlow Engineering Co. (1955) 45 Cal.2d 388.) The operation of section 426.30, subdivision (a), thus bars a second lawsuit between the same parties on a "related cause of action" that could have been pled in the first action. Related cause of action is defined as "a cause of action which arises out of the same transaction, occurrence, or series of transactions or occurrences" (§ 426.10.) In order to achieve the legislative purpose of the compulsory cross-complaint statute, "the word `transaction should be interpreted broadly to encourage the joining of all claims arising from `a series of acts or occurrences logically interrelated. " (Ranchers Bank v. Pressman (1971) 19 Cal.App.3d 612, 620.)
Here Sahnis cross-complaint in case No. CV782903 raised allegations that in selling the business to him, Banks had fraudulently misrepresented its income, thus causing Sahni to be unable to meet payments on the debts of the business. This is the same factual basis underlying Sahnis claim for relief in the case before us, where he alleged that "[a]s a direct result of the lack of cash flow resulting from defendants fraud and deceit plaintiffs were unable to pay the sum due on the defendants carry-back note for $110,000." Although he deleted his cause of action for fraud in his second amended complaint, the second amended complaint nonetheless alleged that the foreclosure sale of Unit 32 "was the result of defendants fraud and fraud in the inducement in the 1998 sale of Unit 32 to plaintiffs." The 1998 sale of Unit 32 was an integral part of the 1998 sale of the business from Banks to Sahni. The fraud alleged by Sahni in his cross-complaint, causing him to default on the promissory note secured by personal property of the business, was the same fraud alleged in the later action against Banks, which had caused Sahni to default on the promissory note secured by the real property. In our view, this was clearly a "related cause of action" within the meaning of the statute, which should have been included in Sahnis cross-complaint in 1999. Thus the second action seeking relief for the same alleged fraud was barred.
The cross-complaint was not made a part of our record. However, a declaration of Sahni, which was filed with the cross-complaint, states the factual basis of his allegations.
Substance of the Second Amended Complaint
Sahni points out that the second amended complaint contained only a cause of action for declaratory relief and did not include the factual allegations of fraud that had been stated in the initial complaint and in the first amended complaint. However, this pleading strategy does not avoid the requirements of section 426.30, subdivision (a), as the trial court acknowledged. As a general rule, "material factual allegations in a verified pleading that are omitted in a subsequent amended pleading without adequate explanation will be considered by the court in ruling on a demurrer to the later pleading." (Shoemaker v. Myers (1990) 52 Cal.3d 1, 13; Lee v. Hensley (1951) 103 Cal.App.2d 697, 709.)
Sahni argues further that an action for declaratory relief is not generally subject to demurrer, so long as an actual controversy is alleged. (See, e.g., Ludgate Ins. Co. v. Lockheed Martin Corp. (2000) 82 Cal.App.4th 592, 606.) Here, however, the controversy that is alleged as to the ownership of Unit 32 is based entirely upon the claim that Bankss fraudulent misrepresentations in selling Sahni the business caused Sahni to default on the loan and thus resulted in Banks taking back the property at foreclosure. Any relief granted in this case would require a finding of fraud in the sale transaction, a matter that was fully litigated in the previous action.
Sahnis reliance on section 426.60, subdivision (c), is unavailing. That section provides that compulsory joinder of all related causes of action is not required where the only relief sought is declaratory relief. This exception applies, however, where the declaratory relief action is the first action, and not, as in this case, the second action.
Section 426.60 lists certain exceptions to the rule requiring joinder of all related causes of action. Subdivision (c) provides: "This article [article 2, title 6, "Compulsory Cross Complaints"] does not apply where the only relief sought is a declaration of the rights and duties of the respective parties in an action for declaratory relief . . . ."
Were Claims re Foreclosure Ripe at Time of First Action?
The compulsory cross-complaint statute provides that a party must include all related claims he or she has "at the time of serving his [or her] answer to the complaint." (§ 426.30, subd. (a).) Sahni points out that the foreclosure sale was not completed until November of 1999, whereas his cross-complaint in the first action was filed in July of 1999. Thus at the time of his cross-complaint he could not have included a claim to set aside the foreclosure sale because the trustees deed had not yet transferred the property back to Banks.
There is authority for the proposition that claims that arise after an answer is filed in an earlier action are permissive, not compulsory, and cannot be barred in a subsequent action. (Crocker Nat. Bank v. Emerald (1990) 221 Cal.App.3d 852, 864.) That rule does not apply here, however. The foreclosure proceedings were commenced in June of 1999, before Sahni filed his cross-complaint. He was on notice of these proceedings and was aware of the likelihood of the loss of the property through foreclosure. At the time he filed his cross-complaint in July of 1999, he was also aware of and alleged the facts of the fraud giving rise to a claim that the foreclosure sale was improper. We see no reason why he could not have included a claim for prospective damages resulting from the foreclosure at the time of his answer and cross-complaint. Indeed the compulsory cross-complaint statute would seem to require such inclusion. Furthermore, any claim regarding the propriety of the foreclosure sale was certainly ripe in November of 1999, when the property was transferred back to Banks. This was still prior to the arbitration of the first action and Sahni could have amended his cross-complaint at that time. (§ 426.50; see also, AL Holding Co. v. OBrien & Hicks, Inc., supra, 75 Cal.App.4th at p. 1314.)
Were Claims re Foreclosure Barred in the First Action?
Sahni argues that he did not have the opportunity to raise claims regarding the foreclosure in the first action because Banks successfully argued at the time that those claims were separate from the civil action. Sahni quotes from arguments made by Banks at a proceeding in November of 1999 opposing an order staying the trustees sale. In that proceeding, Banks contended that allegations of fraud in connection with the sale of the business were not relevant to the foreclosure proceedings. Furthermore, Banks argued that the question whether there was fraud underlying the foreclosure of the deed of trust was not arbitrable because the promissory note and deed of trust did not contain any provision for arbitration. After the hearing where these arguments were tendered in November of 1999, the court apparently ordered the stay lifted so that the trustees sale could go forward.
Sahnis argument appears to be that because the court allowed the foreclosure to proceed, based on Bankss argument that it was a separate matter from the fraud cause of action and that it was not arbitrable, Sahnis failure to plead any claim regarding the foreclosure in his cross-complaint in the fraud action was excused. He relies on an exception to the compulsory cross-complaint statute providing that a litigant is not required to include a claim as to a related cause of action if "[t]he court in which the action is pending does not have jurisdiction to render a personal judgment . . . " as to that cause of action. (§ 426.30, subd. (b)(1).) The circumstances here do not fall within this exception. There is no question that the arbitrator had the jurisdiction to adjudicate the fraud action in case No. CV782903. It follows that the arbitrator could make an award including all remedies to which Sahni was entitled. If Sahni were entitled to damages resulting from the foreclosure sale, or to other relief as a result of the fraud, he offers no reasoned basis why the arbitrator could not make such an order. Furthermore, Bankss arguments in 1999 opposing a stay on the foreclosure proceedings are of questionable legal effect. There is no showing that the court in the action before us took judicial notice of the document containing these arguments. And we do not know on what basis the court in 1999 made its order to lift the stay on the foreclosure proceedings. Our review does not extend to orders or other matters not properly made a part of the record.
Statute of Limitations
Since we affirm the courts judgment of dismissal on the basis of principles of res judicata contained in the compulsory cross-complaint statute (§ 426.30, subd. (a)), we need not address the additional claim that Sahnis action was barred by a three-year statute of limitations. (§ 338.)
Abuse of Discretion
Sahni does not make any showing how the second amended could be amended further to state a cause of action. We find no abuse of discretion. (Zelig v. County of Los Angeles, supra, 27 Cal.4th at p. 1126.)
DISPOSITION
The judgment of dismissal is affirmed.
WE CONCUR: WUNDERLICH, J., MIHARA, J.