Opinion
G063472
08-20-2024
DOUG WALL CONSTRUCTION, INC., Cross-complainant and Appellant, v. CALMWATER ASSET MANAGEMENT, LLC, Cross-defendant and Respondent.
Marc S. Homme; Lynberg & Watkins, Trevor O. Resurreccion, and Bradley L. Wilson for Cross-complainant and Appellant. Reed Smith, Marsha A. Houston, Christopher O. Rivas, Kasey J. Curtis, and Charles P. Hyun for Cross-defendant and Respondent.
NOT TO BE PUBLISHED
Appeal from a judgment of the Superior Court of Riverside County No. RIC1905743 Angel M. Bermudez, Judge. Reversed and remanded with instructions.
Marc S. Homme; Lynberg & Watkins, Trevor O. Resurreccion, and Bradley L. Wilson for Cross-complainant and Appellant.
Reed Smith, Marsha A. Houston, Christopher O. Rivas, Kasey J. Curtis, and Charles P. Hyun for Cross-defendant and Respondent.
OPINION
MOORE, ACTING P. J.
When assessing the sufficiency of a complaint's allegations against a general demurrer, courts must take care to construe the allegations in the light most favorable to the plaintiff and to draw all reasonable inferences in the plaintiff's favor. In this case, the trial court sustained the defendant's demurrer without leave to amend because it drew inferences in the defendant's, rather than the plaintiff's, favor. This was error, and we reverse.
I
Because this matter was decided on a demurrer, the facts herein are derived from the pleadings in the record.
Appellant Doug Wall Construction Inc., (Doug Wall) was hired in or around June 2017 to act as the general contractor on the construction of a hotel project in Coachella. Doug Wall's contract was with the then-owner of the property, Glenroy Coachella, LLC (Glenroy Coachella). The hotel project would consist of several buildings and improvements, and Doug Wall's scope involved a limited portion of it.
At some point after Doug Wall signed its contract with Glenroy Coachella, several other limited liability companies obtained an interest in the property as well.
As the work progressed, Glenroy Coachella repeatedly defaulted on making payments for Doug Wall's work. By the fall of 2017, Doug Wall had substantially stopped work for lack of payment. At that time, Stuart Rubin, Doug Wall's point of contact with the property owners, advised Doug Wall's principals that the owners were seeking to refinance the project. Rubin told them the financing would be sufficient to pay the amounts due and owing, as well as amounts necessary to complete the project, including Doug Wall's scope of work.
The financing was obtained through U.S. Real Estate Credit Holdings III-A, L.P. (USRECH). However, it was cross-defendant and respondent Calmwater Asset Management, LLC (Calmwater) who Doug Wall believes capitalized and formed USRECH for purposes of being the lender in the transaction. Doug Wall alleges that Calmwater acted as USRECH's agent and represented itself as such; and Calmwater did all of the underwriting for the loan and administrative work surrounding the loan.
Prior to consummating the loan transaction, Calmwater, on USRECH's behalf, retained a construction consulting company called Marx-Okubo Associates, Inc. (Okubo) to evaluate the project's financial viability. In October 2017, Doug Wall representative Bill Butler received an e-mail from Tristine Lim. The e-mail was also sent to Ian Waddell, an architect on the project. Lim's e-mail address and signature indicated she was employed by Calmwater. She told Butler and Waddell that Calmwater was "the prospective lender on this deal" and that Calmwater was "working directly with Stuart and Joseph Rubin." She further explained that Calmwater had engaged Okubo to conduct a review, and asked to set up a "kickoff call" between Butler, Waddell, and Okubo. In a separate e-mail, Lim asked Butler to provide extensive information regarding the project, including plans and specifications. Apparently, the plans and specifications Doug Wall had were limited, but they provided the plans nonetheless.
Between November 2017 and the date of the loan's closing in April 2018, Doug Wall had little or no direct communication with Calmwater. Rather, much of its information about the status of the transaction came through Stuart Rubin. Doug Wall received three documents which it understood Calmwater required it to sign in order for the loan to close: (1) a construction contract estoppel certificate, (2) a contractor's certificate, and (3) a general contractor's consent to assignment of contractor's agreement (referred to collectively herein as the "subordinating documents"). The general contractor's consent document contained a clause subordinating Doug Wall's mechanics lien to the liens created by the loan agreement. The construction contract estoppel certificate stated Doug Wall had received $2,527,749.62 to date in payments, and as of the date of closing of the loan, it would be owed $5,162,380.69.
Specifically, the clause states: "The Contractor hereby expressly subordinates all contractual, constitutional and statutory mechanics' and materialmen's liens to which Contractor may be or become entitled, to all liens and security interests securing the Loan contemplated by the Loan Agreement . . ."
Also as a condition of closing the loan, Calmwater required Doug Wall to produce a budget related to its limited scope of work. Doug Wall prepared the budget, but left out about $23 million worth of additional improvements necessary to complete the entire project, outside its scope of work. Doug Wall was not told that Calmwater required a budget for the rest of the project.
In March 2018, only a few days before Calmwater required Doug Wall to sign the subordinating documents, it received Okubo's report. The report revealed the project had significant issues, including incomplete plans and specifications. And Okubo found Doug Wall's budget detail inadequate to complete the entire project. Doug Wall was unaware of the substance of Okubo's report when it signed off on the subordinating documents. It believed it would be paid $5,162,380.69, the amount it was owed, once the loan closed.
The loan agreement was signed on April 26, 2018, by Calmwater's principal, Larry Grantham, on behalf of USRECH. The loan closed only after Doug Wall signed and delivered the subordinating documents to Calmwater's attorney. The loan was for $24 million and was to be secured by a first priority Deed of Trust, Security Agreement and Financing Statement. Doug Wall alleges Calmwater knew at closing that the loan would be insufficient to complete the project, that the collateral was substandard, and that Doug Wall would not be paid what it was owed. After closing, Doug Wall only received $4.5 million. The project was never completed.
Specifically, Calmwater is listed as USRECH's "investment manager," and was authorized to sign on USRECH's behalf.
On October 8, 2019, Doug Wall filed a complaint in Riverside County Superior Court to foreclose on its mechanics lien. A little over a month later, USRECH filed a complaint against the owner-borrowers to foreclose on its deed of trust. USRECH's complaint also named Doug Wall on causes of action for fraud in the inducement and negligent misrepresentation based on the budget figures it provided.
Doug Wall filed a cross-complaint against USRECH on June 5, 2020, seeking rescission of the subordination provision in the general contractor's consent document. The cross-complaint also alleged fraud. On December 20, 2022, with leave of court, Doug Wall amended its cross-complaint and added Calmwater as a cross-defendant on the fraud claim.
Doug Wall's mechanics lien action was consolidated with the USRECH case.
Calmwater filed a demurrer on the grounds that the fraud claim failed to state facts sufficient to constitute a cause of action. (Code Civ. Proc., § 430.10, subd. (e).) Calmwater argued the fraud claim lacked specificity and foundation because it was not a party to the loan and was not the lender. It further claimed it had no duty to disclose any of the facts Doug Wall insisted were concealed. Finally, Doug Wall had failed to identify any misrepresentation by anyone at Calmwater. The trial court agreed with these arguments and sustained the demurrer with leave to amend.
Doug Wall filed its second amended cross-complaint on March 24, 2023. This version of the pleading contained more detail. Doug Wall alleged Calmwater was directly involved in creating and controlling USRECH for the purpose of being the lender in the transaction. And Doug Wall attached the Lim e-mails showing Calmwater's involvement. Nevertheless, the trial court once again sustained Calmwater's demurrer, this time without leave to amend. Doug Wall timely appealed.
II
DISCUSSION
"In reviewing the sufficiency of a complaint against a general demurrer, we are guided by long-settled rules. 'We treat the demurrer as admitting all material facts properly pleaded, but not contentions, deductions or conclusions of fact or law. [Citation.] We also consider matters which may be judicially noticed.' (Serrano v. Priest (1971) 5 Cal.3d 584, 591.) Further, we give the complaint a reasonable interpretation, reading it as a whole and its parts in their context. (Speegle v. Board of Fire Underwriters (1946) 29 Cal.2d 34, 42.) When a demurrer is sustained, we determine whether the complaint states facts sufficient to constitute a cause of action. (See Hill v. Miller (1966) 64 Cal.2d 757, 759.) And when it is sustained without leave to amend, we decide whether there is a reasonable possibility that the defect can be cured by amendment: if it can be, the trial court has abused its discretion and we reverse; if not, there has been no abuse of discretion and we affirm. (Kilgore v. Younger (1982) 30 Cal.3d 770, 781; Cooper v. Leslie Salt Co. (1969) 70 Cal.2d 627, 636.)" (Blank v. Kirwan (1985) 39 Cal.3d 311, 318.) Where, as here, the demurrer presents a pure question of law, we independently review the pleading to determine whether it states a cause of action. (See Geernaert v. Mitchell (1995) 31 Cal.App.4th 601, 603 (Geernaert).) Since we find the second amended cross-complaint sufficiently stated a cause of action for fraud, the amendment issue is moot.
A fraud cause of action can be founded upon an intentional misrepresentation, a concealment, or a false promise. (See Civ. Code, § 1710 [defining "deceit"].) "The essential allegations of a cause of action for deceit are[:] representation, falsity, knowledge of falsity, intent to deceive, and reliance and resulting damage (causation). (5 Witkin, Cal. Procedure (5th ed. 2008) Pleading, § 710, p. 125.) '[F]raud must be pled specifically; general and conclusory allegations do not suffice.' (Lazar v. Superior Court (1996) 12 Cal.4th 631, 645.) The particularity requirement '"necessitates pleading facts which "show how, when, where, to whom, and by what means the representations were tendered.'"' [Citation.] A plaintiff's burden in asserting a fraud claim against a corporate employer is even greater. In such a case, the plaintiff must "allege the names of the persons who made the allegedly fraudulent representations, their authority to speak, to whom they spoke, what they said or wrote, and when it was said or written."' (Ibid.)" (Hamilton v. Greenwich Investors XXVI, LLC (2011) 195 Cal.App.4th 1602, 1614.) But "although it seems sound to require specific pleading of the facts of fraud rather than general conclusions, the courts should not look askance at the complaint, and seek to absolve the defendant from liability, on highly technical requirements of form in pleading." (5 Witkin, Cal. Procedure (6th ed. 2024) Pleading, § 710, p. 131.)
Doug Wall's allegations against Calmwater implicate two types of fraud: intentional misrepresentation and concealment. Specifically, the cross-complaint alleges Calmwater intentionally misrepresented that Doug Wall would be paid $5,162,380.69 at the closing of the loan. Doug Wall further alleges Calmwater concealed several material facts: (1) that the lender had not taken reasonable steps to evaluate the project or ensure its successful completion, (2) that the lender and Rubin would not have sufficient funds to pay Doug Wall and other contractors for their scope of work, and that (3) Okubo had reported the loan was deficient and risky. Even though Calmwater knew these facts, says Doug Wall, Calmwater still required Doug Wall to subordinate its liens.
In its demurrer, Calmwater argued Doug Wall failed to plead its fraud claim with the required level of specificity, because it was unable to say who at Calmwater had said what. Rather, Doug Wall continually alleged Rubin is the one who made representations. And with respect to concealment, Calmwater contends it had no duty to disclose the information that Doug Wall claims it kept secret. In the end, neither of Calmwater's arguments persuades us.
A. Intentional Misrepresentation
At first blush, it would appear Doug Wall's allegations lack the required specificity, because, as Calmwater points out, Doug Wall does not allege any specific communications between it and Calmwater in which Calmwater made the representations alleged to have been knowingly false. However, Doug Wall does allege it was in contact with Stuart Rubin, and as the Lim e-mails state, Rubin was in contact with Calmwater. A trier of fact could thus reasonably infer that Doug Wall was indirectly receiving information about the transaction from Calmwater through Rubin. On demurrer, we must draw this inference as it is most favorable to the plaintiff. The question then becomes: can such indirect transmission of information constitute a misrepresentation? The answer is yes.
Calmwater, both here and in the trial court, repeatedly attempts to distance itself from the loan, claiming USRECH is the lender, and it had nothing to gain from the transaction. A reasonable trier of fact might be highly skeptical of this claim. The Lim e-mails state explicitly that Calmwater is the prospective lender. No one from USRECH is listed on these e-mails. The loan agreement was signed by a Calmwater officer. Doug Wall alleges Calmwater "stood to make a substantial fee" for its work on the transaction. Indeed, we would question why Calmwater would be involved at all if it had nothing to gain from the transaction.
"It has traditionally been the law in this state that to be liable for actionable fraud the defendant must intend his representation (or concealment) be relied upon by a particular person or persons. (5 Witkin, Summary of Cal.Law (9th ed. 1988) Torts, § 707, p. 807.) However, it is also recognized that the defendant will not escape liability if he makes a misrepresentation to one person intending that it be repeated and acted upon by the plaintiff. (See Simone v. McKee (1956) 142 Cal.App.2d 307, 313-314, 298; American T. Co. v. California etc. Ins. Co. (1940) 15 Cal.2d 42, 67, 98.)" (Geernaert, supra, 31 Cal.App.4th at p. 605.) "Similarly, California recognizes the rule of section 531 of the Restatement Second of Torts that a fraudulent representation intended to defraud any member of "'the public or a particular class of persons'" may give rise to liability in favor of anyone who detrimentally relies on the representation, whether it was directly communicated or not. (Bily v. Arthur Young & Co. (1992) 3 Cal.4th 370, 415 . . . [dealing with auditor's liability to third persons who act in reliance on information in the audit report]; see also Rest.2d Torts, § 531.)" (The MEGA Life & Health Ins. Co. v. Superior Court (2009) 172 Cal.App.4th 1522, 1530.)
Again, all reasonable inferences must be drawn in Doug Wall's favor. Therefore, we must presume that any information or instruction Calmwater was giving Rubin about the transaction - especially what was required to close it - was given not just with the expectation, but also the intent, that Doug Wall receive and rely upon it. We must presume this because the cross-complaint alleges Calmwater required Doug Wall to sign off on the subordinating documents in order to close the loan. If Doug Wall was a necessary participant in the transaction, surely Calmwater must have intended Doug Wall to rely on the information Calmwater gave Rubin.
Also, if the representations were made by Calmwater through Rubin, Calmwater is in a better position to know who made such statements, when, and how, thus alleviating Doug Wall's obligation to plead these facts with specificity. (See Tenet Healthsystem Desert, Inc. v. Blue Cross of California (2016) 245 Cal.App.4th 821, 840.)
The trial court came to an opposite conclusion because it did not allow for the inferences we have just highlighted. It also concluded Doug Wall had failed to allege a representation that it would be paid the entire balance due because the subordination documents did not explicitly state as such. Rather, the construction contract estoppel certificate stated the balance Doug Wall was still due. And the general contractor's consent document contained the following language: "Nothing herein shall be construed to impose upon Lender any duty with respect to the application of the proceeds of the loan contemplated by the Loan Agreement or to give any notice of any type to Contractor. Contractor acknowledges that lender is obligated under the Loan Agreement only to the Owner and to no other person or entity. Contractor is executing this consent and Agreement to induce lender to advance funds under the Loan Agreement, and Contractor understands that Lender would not do so but for Contractor's execution and delivery of this Consent." This language, however, only further reflects Doug Wall's critical role in the loan transaction. It also strengthens the inference that Calmwater would need to have reassured Doug Wall that it would get paid if the loan closed. A trier of fact could reasonably conclude Doug Wall would lack the incentive to sign off on the subordinating documents otherwise.
In its respondent's brief, Calmwater contends Doug Wall has failed to allege facts showing that it knew its purported representation about Doug Wall getting paid with the loan proceeds was false. We disagree. Doug Wall alleges Calmwater received a devastating report from Okubo prior to the time it asked Rubin to have Doug Wall sign the subordinating documents. It also knew Doug Wall's proposed budget was inadequate per the Okubo report. There are sufficient facts alleged that Calmwater must have known by then that the loan would not be sufficient to bring Doug Wall current, let alone finish the project.
B. Concealment
The concealment portion of Doug Wall's claim centers on Calmwater's failure to disclose that the loan would be insufficient to pay Doug Wall and finish the project. A major fact Calmwater allegedly did not disclose was the Okubo report. In its demurrer, Calmwater asserted it had no duty to disclose this information, and the trial court agreed.
"[U]nder Civil Code section 1710, subdivision (3), fraud may consist of a suppression of a material fact in circumstances under which the defendant has a legal duty of disclosure. (See Lingsch v. Savage (1963) 213 Cal.App.2d 729, 735 ['the person charged with the concealment or nondisclosure of certain facts' must be found to be 'under a legal duty to disclose them"'].) As explained by the Fourth District Court of Appeal, Division One, 'There are "four circumstances in which nondisclosure or concealment may constitute actionable fraud: (1) when the defendant is in a fiduciary relationship with the plaintiff; (2) when the defendant had exclusive knowledge of material facts not known to the plaintiff; (3) when the defendant actively conceals a material fact from the plaintiff; and (4) when the defendant makes partial representations but also suppresses some material facts. [Citation.]" [Citation.]' (LiMandri v. Judkins (1997) 52 Cal.App.4th 326, 336 (LiMandri).) As the court in LiMandri explained further, other than the first instance, in which there must be a fiduciary relationship between the parties, 'the other three circumstances in which nondisclosure may be actionable presuppose[ ] the existence of some other relationship between the plaintiff and defendant in which a duty to disclose can arise .... "[W]here material facts are known to one party and not to the other, failure to disclose them is not actionable fraud unless there is some relationship between the parties which gives rise to a duty to disclose such known facts." [Citation.]' (Id. at pp. 336-337, original italics, quoting BAJI No. 12.36 (8th ed. 1994).) A relationship between the parties is present if there is 'some sort of transaction between the parties. [Citations.] Thus, a duty to disclose may arise from the relationship between seller and buyer, employer and prospective employee, doctor and patient, or parties entering into any kind of contractual agreement.' (LiMandri, at p. 337, original italics, citing Warner Constr. Corp. v. City of Los Angeles (1970) 2 Cal.3d 285, 294.)" (Hoffman v. 162 North Wolfe LLC (2014) 228 Cal.App.4th 1178, 1186-1187.)
In LiMandri, the plaintiff was an attorney whose clients received a large settlement in environmental litigation, which included plaintiff's attorney fees. The clients obtained a loan and granted a security interest in the settlement proceeds to the lender. The lender's counsel failed to tell plaintiff about the lien, and thus the fees owed to plaintiff were tied up in an interpleader action for seven months, costing him over $100,000. (LiMandri, supra, 52 Cal.App.4th at p. 335.) He sued in part for fraudulent concealment. The Fourth District Court of Appeal, Division One, held plaintiff had failed to allege a duty to disclose on the part of the defendant, because there was no transaction or contract between them. (Id. at p. 337.) The trial court in our case cited LiMandri for the proposition that Doug Wall had failed to allege any such relationship. Again, we must disagree.
Even if Calmwater was not the actual lender, Calmwater is alleged at least to have been the facilitator and administrator of the loan transaction. According to the cross-complaint, Calmwater failed to disclose what it knew in order to induce Doug Wall to sign away its constitutional mechanics lien rights. Only with a first priority lien would USRECH/Calmwater be willing to consummate the loan. Even if Calmwater was not a fiduciary of Doug Wall, we find under the circumstances of this transaction, it did have a duty to disclose any material facts which might have affected Doug Wall's willingness to sign the subordinating documents. (See Middlebrook-Anderson Co. v. Southwest Sav. & Loan Assn. (1971) 18 Cal.App.3d 1023, 1037 [finding "[a]n implied agreement . . . from lender's alleged actual knowledge of the provisions of the seller's lien in general, and of the subordination therein in particular"].)
Another issue is Doug Wall asserts USRECH and Calmwater are alter egos, which itself is a factual matter which cannot be resolved by us on demurrer.
While Calmwater claims in its respondent's brief that Doug Wall waived this issue by not raising it in the trial court, the trial court sustained the demurrer in part because it found there was no duty to disclose. The trial court clearly thought the issue was raised.
We therefore conclude the demurrer to Doug Wall's fraud cause of action should have been overruled.
III
DISPOSITION
The order dismissing Calmwater as a cross-defendant on Doug Wall's cross-complaint is reversed. The matter is remanded to the trial court with the instruction that Calmwater's demurrer be overruled, and that it be ordered to answer the second amended cross-complaint. Appellant to recover its costs on appeal.
WE CONCUR: MOTOIKE, J., DELANEY, J.