Opinion
G053778
10-19-2017
JOHN DELONG et al., Plaintiffs and Respondents, v. HAROLD J. BROWN, Defendant and Appellant.
Van Riper Law and David A. Van Riper for Defendant and Appellant. Law Offices of Randall S. Waier and Randall S. Waier for Plaintiffs and Respondents.
NOT TO BE PUBLISHED IN OFFICIAL REPORTS
California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115. (Super. Ct. No. 30-2012-00590266) OPINION Appeal from a judgment of the Superior Court of Orange County, Linda S. Marks, Judge. Affirmed. Van Riper Law and David A. Van Riper for Defendant and Appellant. Law Offices of Randall S. Waier and Randall S. Waier for Plaintiffs and Respondents.
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Harold J. Brown challenges the sufficiency of the evidence to support the jury's $1,225 million special verdict in favor of John and Judith Delong finding Brown breached his fiduciary duty to them in promoting an investment opportunity. Brown contends the jury could not reasonably conclude he owed the Delongs a fiduciary duty, and he argues the evidence does not show he caused the loss of their funds. As we explain, these contentions are without merit and therefore we affirm the judgment.
I
FACTUAL AND PROCEDURAL BACKGROUND
The Delongs first met Brown and Brown's business associate, William Broza, about an investment opportunity in the Pacific Medical Plaza building in Costa Mesa in early 2009. Brown told the Delongs "it was his building and he was putting [a] surgery center in the . . . bottom floor, and that it was going to be wonderful and make lots of money." He explained that the surgery center, known as Renaissance Surgical Arts (sometimes Renaissance), "needed the money to complete . . . tenant improvements" to open the facility. The Delongs did not know that Brown had turned to Broza to recruit private investors when Renaissance could not obtain institutional financing to complete the surgery center buildout. Broza brought in the Delongs and three other prospects (the Broza Group).
Brown met twice with the Delongs, assuring them he would act as their personal agent to "protect" any funds they invested by ensuring they were used solely to complete the necessary improvements, including installing state-of-the-art medical equipment and other fixtures. He explained that an investment of $1.5 million would earn the Delongs not only 12 percent interest and full repayment in three years, but also a partial ownership interest in Renaissance Holdings, the holding company that owned Renaissance Surgical Arts, which would operate the surgery center.
Brown did not tell the Delongs that the project was embroiled in lawsuits, delays, and cost overruns. He did not disclose numerous subcontractors and materialmen filed suit because they had not been paid, nor that the chief contractor, Columbo Construction, had abandoned the jobsite months before and was seeking to foreclose on a $2.5 million mechanic's lien. Brown also did not reveal that he had told the initial doctor investors more than a year earlier in 2007 that the project would cost $1.7 million and would be completed in 10 months — targets he failed to meet. Nor did he tell the Delongs that as the managing agent for Pacific Medical Plaza he had recently verified an unlawful detainer complaint to evict Renaissance Surgical Arts from its leasehold in the building.
Brown also did not disclose the incestuous nature of the project, in which Brown's children actually owned the Pacific Medical Plaza building, but also owned interests in Renaissance Holdings and Renaissance Surgical Arts through a company, "BSM," which was an acronym for the last names of Brown's children. Although putatively only a consultant managing the building for its corporate owner and only a director of Renaissance Holdings and Renaissance Surgical Arts, though he owned no membership shares in either, Brown dominated the activities of all these entities, marketing leaseholds in "his" building and offering membership units in Renaissance and Renaissance Holdings to investors and lenders. For example, Brown described himself in a Renaissance Surgical Arts board meeting as the "point person" with exclusive authority to "pitch" investment in the surgery center to the Delongs. Ultimately, after Renaissance Holdings and Renaissance Surgical Arts declared bankruptcy in 2011 and the Delongs lost their investment, Brown acquired and sold the right to operate the surgery center, including the use of the medical fixtures and other tenant improvements the Delongs funded, to Memorial Hospital for $5 million.
But back in early 2009, without knowledge of Renaissance's financial and legal woes and trusting in Brown's assurances as the promoter of the project that he would act as a "gatekeeper" to disburse their funds only for fixtures and tenant improvements, the Delongs committed to the investment on the terms Brown proposed. The Delongs initially invested $1.5 million in the project. They deposited the funds in an escrow account Brown set up and controlled.
According to the Delongs, Brown did nothing to keep his promise to "screen" or "filter" the use of their funds to ensure they were dedicated to tenant improvements, even though he believed Bruce Wallace, the surgical center's manager, was untrustworthy and Brown later claimed Wallace absconded with most of the funds. The Delongs presented evidence Brown, not Wallace, directed the majority of the funds in the account to third parties rather than to the promised improvements, and mismanaged, commingled, and depleted the funds. Brown transferred large sums to his company, Brown Associates, but could not account for their use; similarly, he authorized a payment of over $800,000 to an unknown account, for which he offered no explanation; and he directed payments from the escrow account for other projects his children undertook in the building, rather than completing the surgery center, and he paid their legal bills from the account.
In mid-2009, Brown solicited another $200,000 from the Delongs on the same terms, including additional membership units in Renaissance Holdings, and again for tenant improvements to speed the opening of the surgery center. He failed to tell the Delongs he believed the additional funds were necessary because Wallace was misappropriating money. Nor did he tell the Delongs that Renaissance faced ongoing lawsuits or that the surgery center was only about one-third done and the additional funding, including $300,000 from other investors, was far from sufficient to finish construction. After the Delongs wired the funds to the same escrow account as before, Brown did not tell them he used the money to buy out doctors who had initially invested in the surgery center and wanted out. Nor did he tell them he continued to believe Wallace was misappropriating funds.
In January 2010, Brown persuaded the Delongs additional funds were necessary to "finish the surgery center," but this time arranged for a $3.65 million loan from Plaza Bank, conditioned on the Delongs and other members of the Broza Group subordinating their loans. Brown promised the Broza Group $2.85 million of the new Plaza Bank loan would be used to reduce the nearly $4 million in principal from the Broza Group's original loan, and of this reduction payment, the Delongs would receive approximately $700,000. Brown told the Delongs that "if [they] did not subordinate," the Plaza Bank loan would not be approved, the "surgery center couldn't [be] complete[d]," and they would lose their investment.
The Delongs agreed to the subordination based on Brown's assurance the balance of the Plaza Bank loan would be used to complete tenant improvements to make the surgery center operational. Brown instead directed the funds to pay off his children's $1 million line of credit at the Bank of Hemet, paid his children's salaries and personal expenses, deposited sums in their trusts, and paid sums Renaissance owed him and Wallace. He also used the money to pay utility contractors for the Plaza Medical Center for work unrelated to the surgical center, to pay legal bills for the medical center owned by his children, to make charitable contributions, and to pay himself for services unrelated to the surgery center. He deposited another $480,000 into an account for his children at the Bank of Hemet. Brown did not disclose to the Delongs that Renaissance was again in default on its lease, nor that Brown did not believe the surgical center would become operational under Wallace.
The surgical center opened in early 2011, but declared bankruptcy within a few months, unable to stave off the unlawful detainer action Brown filed as the building manager on behalf of Plaza Medical Center for unpaid rent. Renaissance also was unable to pay subcontractor liens despite the $480,000 that still remained in the Brown children's Hemet account.
II
DISCUSSION
Brown challenges the sufficiency of the evidence to support the jury's verdict that he breached a fiduciary duty to the Delongs. Specifically, he contends the jury could not reasonably conclude he owed the Delongs a fiduciary duty, and he argues the evidence does not show he caused the loss of their funds.
"The elements of a cause of action for breach of fiduciary duty are the existence of a fiduciary relationship, breach of fiduciary duty, and damages." (Oasis West Realty, LLC v. Goldman (2011) 51 Cal.4th 811, 820.) The damages must be proximately caused by the fiduciary's breach. (Pierce v. Lyman (1991) 1 Cal.App.4th 1093, 1101.) "A fiduciary relationship is '"any relation existing between parties to a transaction wherein one of the parties is in duty bound to act with the utmost good faith for the benefit of the other party [and] . . . can take no advantage from his acts relating to the interest of the other party without the latter's knowledge or consent."' [Citations.]" (Wolf v. Superior Court (2003) 107 Cal.App.4th 25, 29.)
Whether the facts in the record permit a finding of a fiduciary relationship is a question of law. (Amtower v. Photon Dynamics, Inc. (2008) 158 Cal.App.4th 1582, 1599.) Whether the defendant breached that duty is a question of fact. (Ibid.)
Brown sets up a straw man he easily knocks down to demonstrate he had no fiduciary duty to the Delongs. Acknowledging that "[t]he investment adviser/client relationship . . . give[s] rise to a fiduciary duty as a matter of law" (Hasso v. Hapke (2014) 227 Cal.App.4th 107), he concludes: "Certainly, [Brown] was not an investment adviser as there is no evidence he was compensated." He relies on Corporations Code section 25009, subdivision (a), which defines an investment adviser as "any person who, for compensation, engages in the business of advising others, either directly or through publications or writings, as to the value of securities or as to the advisability of investing in, purchasing or selling securities, or who, for compensation and as a part of a regular business, publishes analyses or reports concerning securities."
But the Delongs did not claim Brown was their investment adviser. The flaw in Brown's challenge is that he does not dispute the Delongs' central thesis he owed them a fiduciary duty as a promoter because he induced them to take an ownership interest in the surgery center venture. "'[P]romoters are fiduciaries.' [Citation.] Any persons who subscribe for stock have a right to do so upon the assumption that the promoters are using their knowledge, skill, and ability for the benefit of the company. It is, therefore, clear on principle that promoters . . . do occupy a position of trust and confidence, and it devolves upon them to make full disclosure. . . ." (Cleveland v. Johnson (2012) 209 Cal.App.4th 1315, 1339 (Cleveland).) A confidential relation arises not just among those who first form a stock association or similar venture, but also applies "'"'to all others who may subsequently become members or subscribers.'"'" (Ibid.) Nor does the right to disclosure depend on holding actual stock certificates, but extends to investors having "effectively an ownership interest in the enterprise," entitled to share in its profits. (Id. at pp. 1342-1343.) Thus, like any "insider" or "seller of a limited partnership interest," "[a] promoter . . . owes a fiduciary duty to the prospective purchaser of such an interest." (Eisenbaum v. Western Energy Resources, Inc. (1990) 218 Cal.App.3d 314, 322.)
Brown does not deny he was a promoter. Nor does he deny that the Delongs' investment included an equity interest through their membership stake in Renaissance Holdings, which they increased with their $200,000 pledge. Instead, in Brown's meager statement of facts and cursory bid for reversal, he ignores their equity position and recites only facts favorable to his appeal. In effect, in omitting mention of the Delongs' ownership interest, Brown contends that because they also secured their investment with loan terms calling for their repayment, they were mere "'creditors or bond holders of a corporation' to whom no fiduciary duty is owed." (Cleveland, supra, 209 Cal.App.4th at p. 1343.)
It does not follow, however, that an investor with an equity interest who takes the additional precaution of securing repayment by a loan loses his status as a fellow member in the corporate undertaking to whom full disclosure is owed. Brown cites no authority and makes no reasoned argument for that conclusion. Nor is the validity of Brown's implied claim self-evident. After all, it is the "'"equitable interest in the issuing corporation [that is] necessary for the imposition of a trust relationship with concomitant fiduciary duties."'" (Cleveland, supra, 209 Cal.App.4th at p. 1342.)
In any event, we conclude Brown has forfeited his challenge by presenting a one-sided statement of facts, ignoring the Delongs' equity interest, and arguing only by implication. "[A]s with any challenge to the sufficiency of the evidence, it is the appellant's burden to set forth not just the facts in its favor, but all material evidence on the point. '"Unless this is done the [asserted] error is deemed to be waived."' [Citation.]" (Stewart v. Union Carbide Corp. (2010) 190 Cal.App.4th 23, 34.)
We must presume the judgment is correct unless error is "'affirmatively shown'" (Denham v. Superior Court (1970) 2 Cal.3d 557, 564), and this bedrock principle applies even where our review is de novo. (Reyes v. Kosha (1998) 65 Cal.App.4th 451, 466, fn. 6.) The appellant must demonstrate error with specific arguments under specific headings marshalling specific facts (Cal. Rules of Court, rule 8.204(a)(1)(B) & (C)), and the lack of analysis or reasoned argument forfeits the challenge. (Opdyk v. California Horse Racing Bd. (1995) 34 Cal.App.4th 1826, 1830, fn. 4; Jones v. Superior Court (1994) 26 Cal.App.4th 92, 99 ["Issues do not have a life of their own: If they are not raised or supported by argument or citation to authority, [they are] waived"].) Consequently, Brown presents no basis for reversal in arguing only that he was not an investment adviser while wholly ignoring the Delongs' equity interest.
Brown's causation challenge also fails. "'[T]he decision whether [a] breach caused the damage (that is, causation in fact) is . . . within the jury's domain'" (Constance B. v. State of California (1986) 178 Cal.3d 200, 207), which we therefore review under the deferential substantial evidence standard. (Janice H. v. 696 North Robertson, LLC (2016) 1 Cal.App.5th 586, 598.) "We must 'view the evidence in the light most favorable to the prevailing party, giving it the benefit of every reasonable inference and resolving all conflicts in its favor . . . .'" (Wilson v. County of Orange (2009) 169 Cal.App.4th 1185, 1188.) Consequently, a party challenging the sufficiency of the evidence assumes a daunting burden. (Ibid.)
Reiterating his focus on the loan aspect of the Delongs' investment, Brown argues he "could not have caused damages to the Delongs" because "once [they] loaned their money to Renaissance, it was no longer their money." In other words, even assuming Brown did anything to cause the Brown's investment in the surgical center to fail with Renaissance's bankruptcy, he did not cause them any harm, only arguably Renaissance. The argument is specious. It overlooks the factual predicate for the Delongs' damages claim, which was that they would not have made their initial investment or contributed an additional $200,000 if Brown had disclosed at the outset that Renaissance was in dire financial and legal trouble, on the verge of losing its lease in an unlawful detainer action Brown himself signed, and facing lawsuits exceeding $2.5 million by the general contractor, subcontractors, and others. It was the jury's sole province to credit the Delongs' testimony that if Brown had disclosed these problems, they would not have made the investment, and Brown's challenge therefore fails.
Similarly without merit is Brown's claim that he did not cause the Delongs any damages because they could not reasonably have thought they would recoup a portion of their investment by agreeing to subordinate their loan to the Plaza Bank loan. He points out that the subordination agreement specifically stated: "Prior to the date upon which the Senior Loan [i.e., Plaza Bank's loan] is indefeasibly paid in full, Junior Lender may not receive any payments on the Junior Indebtedness other than payments of interest in the ordinary course pursuant to the Junior Loan Documents . . . ." But Brown's contention again overlooks that the Delongs testified they would not have invested in the surgical center at all if Brown had disclosed its problems. The jury therefore reasonably could conclude Brown caused their loss.
The jury may have factored the subordination agreement into its damages figure, awarding the Delongs "only" $1,225,000 despite the fact that their investment totaled $1,700,000. The jury may have agreed in light of the subordination terms Brown cites that the Delongs could not reasonably expect to receive, as they testified, repayment of approximately $700,000 out of the Plaza Bank loan proceeds. Discounting their recovery accordingly would have resulted in a damage award of $1 million, but the jury may have arrived at a larger sum because the subordination agreement expressly recognized they were entitled to interest payments. There is no requirement of "absolute precision" in damages. (S.C. Anderson, Inc. v. Bank of America (1994) 24 Cal.App.4th 529, 537-538.) Alternatively, the jury may have settled on the $1,225,000 figure as the Delongs' one-quarter share, as one of four investors in the Broza Group, in the $5 million Brown received on selling the surgery center, including all its improvements, after Renaissance went bankrupt. Brown does not challenge the amount of damages the jury awarded, so these considerations are only academic and furnish no basis for reversal.
Finally, Brown insists he did not cause the Delongs any damage because "there is . . . no evidence that any money was spent improperly, or that Renaissance went bankrupt because of any acts or omissions of Brown." Based on the evidence that Brown misdirected sizable sums to his own company, Brown Associates, another $800,000 to unknown account for an unknown purpose, and $1.48 million and other sums to his children's account, the jury reasonably could disagree. It was the jury's exclusive province to credit the evidence the Delongs presented and regard Brown's evidence as unworthy of belief.
III
DISPOSITION
The judgment is affirmed. Respondents are entitled to their costs on appeal.
ARONSON, J. WE CONCUR: BEDSWORTH, ACTING P. J. IKOLA, J.