Opinion
B326560
12-27-2023
ALBERT BARRIOS, Plaintiff and Appellant, v. JOEL LEEBOVE et al., Defendants and Respondents
Law Offices of Bruce Altschuld and Bruce E. Altschuld for Plaintiff and Appellant. Schreiber & Schreiber, Edwin C. Schreiber, Eric A. Schreiber and Ean M. Schreiber for Defendant and Respondent Joel Leebove. Munger, Tolles & Olson, Robyn K. Bacon, Maggie H. Thompson; Ervin Cohen & Jessup and Barry McNaughton for Defendant and Respondent Patrick Chraghchian.
NOT TO BE PUBLISHED
APPEAL from a judgment of the Superior Court of Los Angeles County No. BC605281, Theresa M. Traber, Judge. Affirmed.
Law Offices of Bruce Altschuld and Bruce E. Altschuld for Plaintiff and Appellant.
Schreiber & Schreiber, Edwin C. Schreiber, Eric A. Schreiber and Ean M. Schreiber for Defendant and Respondent Joel Leebove.
Munger, Tolles & Olson, Robyn K. Bacon, Maggie H. Thompson; Ervin Cohen & Jessup and Barry McNaughton for Defendant and Respondent Patrick Chraghchian.
WILEY, J.
Managers of two residential properties granted an easement for residents of a property called the Campbell to pass through another property named the Burton. The Campbell residents used this easement to get to parking. The easement grant was in exchange for rights of the Burton, first, to build patios encroaching on the Campbell's property and, second, to use the Campbell's courtyard. An investor in the Burton sued, alleging the managers violated fiduciary and other duties. After a bench trial, the court interpreted the company's operating agreement to permit the easement and a related agreement. It resolved other issues in the managers' favor. We affirm.
I
In 2005, Joel Leebove and Patrick Chraghchian formed 123 Los Robles LLC to buy and develop certain real property in Pasadena. We call 123 Los Robles LLC "the company" and Leebove and Chraghchian "the managers."
The managers sought investors to fund the development. Three documents governed the investments: an Offering Circular, a Subscription Agreement, and an Operating Agreement.
Albert Barrios and a few dozen others invested.
The project involved two buildings: the Burton, a new condominium complex, and the Livingstone, a hotel converted into a condominium complex.
While the Burton was being developed, the managers formed another company to buy property directly north of the Burton. The managers ultimately built an apartment building there and called it the Campbell. The managers entered two agreements involving the Campbell that are at issue in this case. These agreements were an easement and a covenant.
The first agreement is a Reciprocal Easement Agreement. It allowed residents of the Campbell to pass through "the garage, driveway areas and parking areas on the ground level and the subterranean parking area(s) of the Burton Project to permit ingress and egress to and from vehicle parking" in the Campbell. It also granted a stairwell easement. In exchange, the company could build patios that extended onto the Campbell's property and residents of the Burton could use a courtyard on the Campbell property.
The second agreement is a related Covenant and Agreement to Hold Property as One Parcel. It says, the "portions of the . . . Parcels in which the access openings will be made and maintained [for the parking easement], shall for purposes of the Building Code only, be held by the Owners [of the Burton and the Campbell] and treated as one parcel." The covenant notes it "shall have no effect on any legal subdivision of the Parcels . . . and shall not impact in any way whatsoever the sale, leasing, financing, or other transfer of all or any part of the Parcels. The fee title to each Parcel shall not merge as a result of this document, but each shall remain as separate and distinct legal estates."
The company associated with the Campbell completed and paid for construction to create openings to join the garages. It also paid about $120,000 to demolish barrier walls that had restricted the Burton patio space and to create a joint courtyard with landscaping between the parcels.
Barrios sued the managers. He alleged they violated their duties to the company by entering the easement and covenant.
The parties dispute whether the Operating Agreement required a majority vote of the members before the managers could enter the easement and covenant. The court took briefing and held a hearing to interpret the Operating Agreement. The court determined this agreement required a vote for some but not all self-dealing transactions.
The court held a bench trial to address the following claims: breach of and conspiracy to breach fiduciary duties and duties of loyalty and due care; declaratory relief for indemnification and profits; dissolution of the partnership, appointment of a receiver, and an accounting.
At the close of Barrios's case, the managers filed Code of Civil Procedure section 631.8 motions to challenge the sufficiency of Barrios's evidence. The court granted in part and denied in part these motions. It ruled Barrios did not prove several claims, including that (1) the investors' returns were improper, (2) payments to Chraghchian's construction company were improper, and (3) the covenant and easement violated the building and fire codes. The court also found the covenant did not merge the Burton and Campbell properties.
The court issued a final statement of decision. It held the easement and covenant did not result in significant changes in the legal, financial, or business structure of the company or its holdings. The court also concluded the agreements fell within the company's regular business. The court found that the agreements were fair and reasonable and the company received benefits equal or greater to those it would have gotten in an arms' length negotiation. This meant the Operating Agreement authorized the agreements without a vote and the managers did not breach their duties. The court denied Barrios's request for declaratory relief, dissolution, appointment of a receiver, and an accounting.
II
The trial court properly interpreted the contract. Substantial evidence supports the factual findings Barrios challenges. Barrios's other arguments fail.
A
The trial court's interpretation of the Operating Agreement was correct. If a contract is ambiguous and extrinsic evidence conflicts, as it did here, the appellate court reviews for substantial evidence. (Tribeca Companies, LLC v. First American Title Ins. Co. (2015) 239 Cal.App.4th 1088, 1110.) Substantial evidence supports the trial court's interpretation.
We detail relevant provisions of the Operating Agreement. One is section 5.3B, which enumerates actions that require a vote. Another is section 5.8, which lets managers enter transactions that may constitute conflicts of interest, under certain circumstances, without a vote.
Section 5.3 is "Powers of Managers." Section 5.3B is "Limitations on Power of Managers." It says managers need a majority vote of members to take enumerated actions, including: merging with another company; establishing a different class of members; altering the primary purpose of the company; lending money to a manager, member, or officer; performing an act that would make it impossible to carry on the ordinary business of the company; and confessing a judgment against the company. The enumerated action relevant to this case is: "Transactions between the Company and one or more of the Managers or one or more of any Manager's Affiliates, or transactions in which one or more Managers, or one or more of any Manager's Affiliates, has a material financial interest."
Section 5.8 is "Transactions between the Company and the Managers." It says, "Notwithstanding that it may constitute a conflict of interest, the Managers may, and may cause their Affiliates to, engage in any transaction (including, without limitation, the purchase, sale, lease, or exchange of any property or the rendering of any service, or the establishment of any salary, other compensation, or other terms of employment) with the Company so long as such transaction is not expressly prohibited by this Agreement, and so long as the terms and conditions of such transaction, on an overall basis, are fair and reasonable to the Company, and are at least as favorable to the Company as those that are generally available from Persons capable of similarly performing them and in similar transactions between parties operating at arm's length."
Section 5.8 goes on to explain that transactions between managers and the company conclusively meet these standards of fair, reasonable, and favorable if a majority of non-interested members approve the transaction. "Notwithstanding the foregoing, the Managers shall not have any obligation, in connection with any such transaction between the Company and the Managers or an Affiliate of the Managers, to seek the consent of the members."
Section 2.6 describes the company's purpose: "engage in any lawful activity for which a limited liability company may be organized," but without the consent of members, the company cannot engage in business other than "the business of acquiring, improving, financing, managing, remodeling, selling and renting" the property.
The Offering Circular says the investment had "significant risks." "[N]o one should invest . . . unless he, she or it is willing to rely on the judgment and ability of the Managers" and the managers have "sole and complete discretion" to control and manage the company's affairs. The circular also warns that the offering involves various actual or potential conflicts of interest between the managers and the company and members. The circular explains the managers may continue their own business activities, including ownership and management of other properties.
The parties offer competing interpretations of the Operating Agreement. Barrios says section 5.3 required a majority vote of members before the managers could enter the easement and covenant. The managers say section 5.8 allowed them to act without a vote.
The court concluded sections 5.3B and 5.8 address different types of interested transactions. Section 5.3B applies to interested transactions that "effect significant changes in the legal, financial, or business structure of the [company] or of its holdings" or that fall outside the company's regular business. On the other hand, section 5.8 governs transactions that arise from the "regular business" of the company and other directly related activities. The court used the Operating Agreement's purpose section, section 2.6, to define "regular business."
After trial, the court applied its interpretation to the easement and covenant. It explained the easement and covenant were dissimilar to the types of transactions 5.3B enumerated, such as a merger, creation of a new class of members, or alteration of the company's primary purpose. They were instead part of the company's regular business of improving and remodeling the property. They also fit within section 5.8's category of "exchange" of property. The court relied on testimony from a former director of planning and development of the City of Pasadena that it was common for developers in the city to negotiate reciprocal easement agreements to share driveways and parking access.
The court found the easement and covenant met section 5.8's requirements to be fair, reasonable, and comparably favorable to an arms' length transaction. The court rejected an opinion from Barrios's expert about the value of the easement because the expert calculated the value as if the easement gave Campbell residents access to the entire Burton premises. The court reasoned this was incorrect because the parking easement did not give such access, nor did it transfer title of the Burton to Campbell residents.
Another expert said the opening between the buildings harmed the company because it created a fire hazard. The court relied on Pasadena's Certificates of Occupancy that approved the buildings for occupancy as strong evidence the properties were safe. By issuing these certificates, inspectors "effectively [found] that [fire] hazards did not in fact exist on the premises of the properties."
The court found the company gained value from the easement. The easement secured the Burton's right to encroach on the Campbell's property, eliminated a barrier wall, and gave Burton residents access to a courtyard. The court based this finding on testimony, photographs, and the court's own visit to the site during trial.
The court concluded the easement and covenant comported with section 5.8. The Operating Agreement therefore authorized the transactions and the managers did not breach their duties.
Substantial evidence supports the court's interpretation of the contract. The Operating Agreement is ambiguous. Section 5.3B might require a vote because the agreements were transactions between the company and managers. If certain criteria were met, though, section 5.8 might permit action without a vote. The court crafted a careful interpretation to harmonize these provisions. The interpretation is consistent with section 5.3B's list of transactions, all of which involve significant changes to the company. The Offering Circular's warnings about conflicts and explanation that managers will have the right to continue with business activities for other properties bolsters the court's reading.
Substantial evidence also supports the court's finding that section 5.8 applied and the easement and covenant met that section's requirements. The easement and covenant were a type of improvement and remodeling and were not a significant change like a merger. The testimony that it was common for local developers to negotiate reciprocal easement agreements to share driveways and parking access supported the finding that the agreements were within the company's regular business. The court considered Barrios's evidence and offered reasoned explanations when it did not credit his experts. There was sufficient evidence, including through the court's site visit, that the increased patio space and courtyard access benefited the company and the agreements were fair, reasonable, and comparably favorable to an arms' length transaction.
Barrios incorrectly contends section 5.8 required the managers to prove the agreements were arms' length. Section 5.8 does not have such a requirement. That section is about transactions between managers and the company and inherently is about transactions that are not arms' length.
Barrios also errs by arguing the easement and covenant could be within the company's ordinary course of business only if the company "earlier entered into these types of agreements." An act can be within the regular course of business and yet be something a company never had to perform before. Maintaining property free of rubbish would be in the regular course of property development. If someone left a junk car on the lawn, it would be within the regular course of business to remove it, even if the company had never confronted this problem or taken this action before.
An action thus may be unprecedented for a particular company yet mundane. For example, Barrios says the company first razed the existing property before it could build the Burton. The company had not razed property before. Like the easement and covenant, this action was within the company's regular business of improving and remodeling the property. The action was something the company had not done before, and yet it was within its regular business. The easement and covenant were within the regular and ordinary business of the company.
In sum, the court's interpretation of the Operating Agreement was correct.
B
The court's Code of Civil Procedure section 631.8 rulings were proper. Barrios unsuccessfully attacks several parts of this ruling. We discuss each issue individually below, but note at the outset that his arguments largely are cursory and fail to address the evidence and rulings of the trial court. We presume judgments are correct and it is the appellant's burden to prove error. (Bullock v. Philip Morris USA, Inc. (2008) 159 Cal.App.4th 655, 685.)
Barrios makes a perfunctory argument about his entitlement to more returns on his investment. Without a page citation to the trial court's ruling, Barrios's opening brief argues, "The appellant was entitled to 8% interest on all invested money, then to disburse to the members. Hence 'preferred.' Respondents testified there was no preferred return just a payment from any profits and the trial court agreed." By failing to cite the court's ruling and failing to address evidence the trial court cited, Barrios has not proven error.
Barrios makes another insufficient argument about whether Chraghchian breached a duty by paying his construction company. The trial court's ruling on this issue cited several exhibits including construction contracts and escrow statements showing the company was paid for completed work. Barrios does not respond to this evidence and instead offers a conclusory argument: "Of course a manager of an LLC has a duty to make sure one of its contractors is not illegally taking money from closing escrows. And failing to do so is a breach." These sentences do not prove error.
Substantial evidence supports the court's finding that there was not a fire hazard. Barrios relies on his expert to argue there was a hazard. The trial court properly relied on the city of Pasadena's issuance of Certificates of Occupancy as evidence there was not a hazard.
The court correctly found the covenant did not merge the Burton and the Campbell. The court relied on abundant evidence, including language of the covenant that says the covenant did not merge the property, testimony of a Pasadena building official that the covenant applied only to the openings below the garage and not to the entire property, and the fact the company that owned the Campbell sold the Campbell, by itself, to a different owner. The court's finding was proper.
The trial court properly denied Barrios's request to present additional evidence under Code of Civil Procedure section 631.8. After Barrios presented his case, the managers each moved for judgment under section 631.8. That section allows the nonmoving party to present additional evidence to rebut adverse evidence and to rehabilitate witnesses whose credibility the moving party attacked. In opposition to the section 631.8 motion, Barrios included in the title of the document, "MOTION TO RE-OPEN CASE IN CHIEF . . . IF NECESSARY." He did not explain what new evidence he wanted to introduce.
The trial court ultimately denied in part and granted in part the Code of Civil Procedure section 631.8 motions. Barrios later raised the issue of re-opening his case and listed some 29 areas of additional evidence and seven witnesses he wanted to rehabilitate. The court explained it could conclude Barrios made an inadequate offer of proof because he made little effort to tether his long list of evidence to the rulings he challenged. The court instead gave a detailed analysis of Barrios's requests and found it had already admitted the evidence Barrios listed and Barrios failed to explain how inclusion would cure the deficiencies the court had identified in its section 631.8 ruling. Barrios's appellate briefs argue only that he had no duty to make an offer of proof. He does not address the independently sufficient grounds that the court had already admitted the relevant evidence and the evidence would not cure his deficiencies. Barrios therefore has not demonstrated error.
C
Barrios makes other unavailing arguments.
Barrios asks us to reject the court's final statement of decision, but he provides no proper legal basis to do so. He argues there was an "irregularity" and cites Code of Civil Procedure section 657. That section is about motions for a new trial. There was no motion for a new trial. We cannot reject the statement of decision on this basis.
The trial court properly applied indemnification provisions from the company's Operating Agreement. Barrios argues default provisions in the Revised Uniform Limited Liability Company Act prohibit indemnification. The managers argue this law does not apply or, in the alternative, the law does not support Barrios. Assuming the law applies, Barrios's argument fails. Corporations Code section 17701.10 allows operating agreements to alter section 17704.08 indemnification provisions. Barrios neither cites section 17701.10 nor explains why it does not control this issue. The trial court correctly applied the Operating Agreement's indemnification provisions.
Barrios makes unavailing evidentiary arguments. First, he says the court improperly admitted testimony by Chraghchian. Second, he says the court improperly excluded expert reports. We do not reverse a judgment due to evidentiary error unless the error resulted in a miscarriage of justice. (Evid. Code, §§ 353 &354.) Barrios says he "surely" would have had a more favorable result without Chraghchian's testimony because, according to Barrios's opening appellate brief, the statement of decision says this was the "only basis" for the decision. For this proposition, Barrios cites page 786 of his appellate appendices. That page is an unrelated portion of a trial court brief Barrios filed. It does not support his argument, nor does it prove prejudice. Regarding the expert reports, Barrios says without elaboration that the exclusion was "very prejudicial." His unsupported evidentiary arguments fail.
Barrios asks us to reverse the trial court's holding that he is not entitled to a dissolution and to set the matter for a hearing on dissolution, accounting, and winding up. We deny this request because Barrios does not establish the trial court erred. The trial court held Barrios's causes of action for dissolution and accounting failed because they were grounded in the same facts and theories as the failed causes of actions for breach of duties. In the alternative, the court found Barrios offered insufficient evidence to support the claims and that by not addressing dissolution or winding up in his closing arguments, he conceded he failed to meet his burden on the claims. Barrios does not discuss these specific and alternate holdings. He has not proven error.
We grant Barrios's March 22, 2023 request for judicial notice.
DISPOSITION
We affirm the judgment and award costs to respondents.
We concur: GRIMES, Acting P. J., VIRAMONTES, J.