Opinion
A148274
06-15-2018
STEVEN EDELMAN et al., Plaintiffs and Respondents, v. JOHN NICHOLSON et al., Defendants and Appellants.
NOT TO BE PUBLISHED IN OFFICIAL REPORTS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 This opinion has not been certified for publication or ordered published for purposes of rule 8.1115. (San Mateo County Super. Ct. No. CIV507680)
During the course of a bench trial, Judge Elizabeth Hill heard testimony from plaintiffs Steven Edelman, Leonard Lehmann, and Stuart Klein, and from defendant John Nicholson. Judge Hill also considered more than 50 exhibits that had been received in evidence. Judge Hill then prepared and entered an exhaustive 27-page "Statement of Decision and Judgment" in which she found defendants Nicholson and W. John Management LLC had committed fraud, causing plaintiffs to lose a million dollars they had invested in NLVLP, "a limited partnership. . . for the development of a condominium project at 855 Woodside Road in Redwood City."
The parties had a history. According to Judge Hill: "Prior to the investment that is the subject of this lawsuit, plaintiffs Klein, Lehmann, and Edelman had each invested in several Nicholson Company projects at the solicitation of defendant John Nicholson. Over the course of their relationship with defendant John Nicholson, they invested in some offered opportunities and passed on others. They sometimes made money and sometimes lost money, and never had a prior occasion to doubt defendant Nicholson's credibility or to sue him over an investment he offered."
The NLVLP project was not one of Nicholson's successes. "Testimony at trial established that . . . plaintiffs and defendant John Nicholson lost the entirety of their investments in the project." Judge Hill concluded that this was due to intentional misrepresentations about the project's financing made by defendant John Nicholson.
As for damages, Judge Hill awarded each plaintiff the amount of his investment, offset by settlement with other defendants, plus considerable prejudgment interest. She declined to award punitive damages. On the issue of whether plaintiffs mitigated their damages, Judge Hill stated in her judgment:
"In his filed objections to the Proposed Statement of Decision, defendant John Nicholson requested that the court address defendants' affirmative defense that plaintiffs failed to mitigate their damages by not requesting that defendant John Nicholson get them out of their investment as soon as they became aware of the problems with the loan in October 2008. Defendant John Nicholson claims that the evidence demonstrates by a preponderance of the evidence that he could have either found another purchaser for plaintiffs' interests or purchased a greater share of NLVLP himself to get them out of the investment had they confronted him timely with their fraud concerns. He also argues that NLVLP's raising of an additional $6 million in equity demonstrates defendant Nicholson's ability to have bought back plaintiffs' investment. Defendant Nicholson argues that the plaintiffs' decision to 'let it ride' constitutes a negligent failure to mitigate their own damages which should cause the court to deny any damages, or in the alternative to award interest only to October 2, 2008.
"Defendant bears the burden of proof as to the affirmative defense of plaintiffs' failure to mitigate damages. The court finds that there is insufficient evidence to support a preponderance finding that defendant had the willingness or ability to mitigate plaintiffs' damages had they notified him of their fraud claim when it first became apparent. Defendant Nicholson cites plaintiffs' testimony that he was known for his ability to find investors to substitute out earlier investors in a project, and that he offered to do so at the June 23, 2008 meeting. Defendant also cites plaintiffs' testimony that they each failed to ask for their money back as evidence that they educated themselves about the project and expected to make a profit. This mischaracterizes plaintiffs' testimony. While each plaintiff did admit to failing to ask defendant Nicholson to find a replacement investor, their reasoning for doing so was summarized best by plaintiff Klein's testimony on the subject. He stated that he did not ask to get his money back when the problems first became apparent because he trusted defendant Nicholson and was slow to conclude that Nicholson had lied based on Klein's long-term relationship with him, that Klein believed that his limited partnership interest would be difficult to sell, and that Klein believed that the best way to salvage the capital invested was to ensure that the project was able to go forward. Plaintiff Klein testified that once the bank stopped construction, he was concerned that the project would go bankrupt and that any litigation over it would be expensive and time consuming. Plaintiff Lehmann admitted to extending a loan to Randy Lamb's LLC, Health Equity Investments LLC, in order to 'rescue' the project. This subsequent loan was personally guaranteed by Lamb and its return was not contingent on sale of the 855 Woodside condos. Plaintiff Lehmann further testified that he would have 'stepped aside' if anyone else had come forward to invest. This testimony does not reflect an educated decision to go forward with an investment expecting a profit, but rather an attempt to make the best of a troubled project and give it the best chance to return anything on the initial investment. The decision to 'let it ride' by the plaintiffs reflected their judgment that they were unlikely to reach a better outcome through presenting obstacles to the project's completion.
"The court also finds insufficient evidence to support defendant John Nicholson's contention that he was willing or able to buy out the plaintiffs' investment, either on his own or through a third-party investor. His own testimony established that although he had a reputation for being able to find substitute investors, he felt no obligation to do so. Specifically, when discussing his perception of the lender's June 8, 2008 proposal of additional equity, he testified that had he believed the bank to be requiring more equity, he would have approached plaintiffs about a mezzanine loan or investment of new funds rather than purchasing Larry Miller's interest, because he had no obligation to get Larry Miller out of the investment he had already made. The court finds this testimony illustrative of defendant Nicholson's general approach to assisting investors out of an investment in the event of an unexpected renegotiation of the lender. The court finds no reason to disbelieve defendant Nicholson's own testimony that faced with a need for new equity, he would seek such new equity first before attempting to release existing investors from a project.
"Further, the documentary evidence submitted by defendant Nicholson demonstrate that the raising of the $6 million in additional equity required by the lender did not go smoothly after October 2008. Contrary to the argument in defendant Nicholson's objections to the court's proposed statement of decision that 'NLVLP raised an additional $6 million to reduce the amount of the loan between October 2008 and May 2009', the construction draw documents introduced in Exhibit 259 tell a different story. Those documents reflect that the additional equity required was staggered—with $4 million in preferred equity completed before the modification, and slightly more than $2 million to be completed by July 2009. Beginning on August 14, 2009 and continuing until October 30, 3009, the draw documents reflect that NLVLP was notified of a default for their failure to raise the $2 million on the timetable required. Subsequent draw documents in Exhibit 259 show that beginning in December 2009, the project was over budget by $1.38 million, and even more equity was required for its completion. As of April 2010, the budget overrun had reached $2.38 million with a corresponding need for more equity, and in May 2010 the last draw document introduced into evidence at trial shows that construction deadlines in the loan modification agreement was missed. This troubled project history defeats any speculative argument by defendant Nicholson that he could have found an alternative investor if asked. Instead, the evidence demonstrates the NLVLP spent a considerable amount of time after October 2008 trying to find additional investment, and repeatedly failed to do so in the timetable required by their lender. It defies logic to believe that defendant Nicholson could have successfully sold plaintiffs' junior equity position at a time when NLVLP was actively soliciting investment that had return priority ahead of plaintiffs, especially given defendant Nicholson's own testimony that in 2009 equity and financing in the real estate market were scare due to the Great Recession."
The sole contention defendants advance on this timely appeal is that Judge Hill "misapplied the legal concept of mitigation." According to defendants, "the problem with the court's analysis on mitigation is that it focused on what it thought Nicholson had the ability to do forensically rather than whether plaintiffs took active steps to mitigate their losses." (Italics omitted.) For defendants, the crucial issue is one of timing. Once plaintiffs knew of the fraud in October 2008, it was up to them to mitigate their damages, which they could have done—but did not—by asking Nicholson to buy them out or find buyers for their limited partnership interests. In short, once plaintiffs discovered the fraud, it was their "duty" to get out.
Judge Hill correctly noted that, as an affirmative defense, it was defendants' burden to establish that plaintiffs failed to mitigate their damages, that is, what measures plaintiffs could have, but did not, take. (Evid. Code, § 600; Agam v. Gavra (2015) 236 Cal.App.4th 91, 111.) That inquiry is to be undertaken "in light of the situation existing at the time and not with the benefit of hindsight." (State Dept. of Health Services v. Superior Court (2003) 31 Cal.4th 1026, 1043-1044.) "The duty to mitigate damages does not require an injured party to do what is unreasonable or impracticable." (Valle de Oro Bank v. Gamboa (1994) 26 Cal.App.4th 1686, 1691.)
Judge Hill concluded that defendants failed to carry their burden of proof, finding "insufficient evidence to support a preponderance finding that defendant had the willingness or ability to mitigate plaintiffs' damages" and "insufficient evidence to support defendant John Nicholson's contention that he was willing or able to buy out the plaintiffs' investment, either on his own or through a third-party investor." In the final paragraph of analysis quoted above, Judge Hill rejected as "def[ying] logic" the "speculative argument by defendant Nicholson that he could have found an alternative investor if asked." Because the burden of proof never shifted to plaintiffs, any absence of mitigation efforts by them is immaterial. (See Powerhouse Motorsports Group, Inc. v. Yamaha Motor Corp. (2013) 221 Cal.App.4th 867, 884 ["The burden of proving a plaintiff failed to mitigate damages . . . is on the defendant, not the other way around."].)
It also appears Judge Hill implicitly determined it was unreasonable to impose a duty to mitigate on the timetable defendants now posit. It was unreasonable because plaintiffs were not committed to the idea that they had in fact been defrauded. They continued to have confidence in Nicholson and in a positive outcome to the venture. That confidence and that expectation were the product of plaintiffs' extensive dealings with Nicholson. Experience may have taught them that not everything said by Nicholson was to be taken literally. The most convincing evidence of this, as defendants concede, is that plaintiffs Klein and Lehmann invested additional sums in the project after the date defendants fix as when plaintiffs ought to have begun pulling out of the project.
Judge Hill found "insufficient evidence to support defendant John Nicholson's contention that he was willing or able to buy out the plaintiffs' investment, either on his own or through a third-party investor." As plaintiffs put it in their brief, their "partnership interests were essentially unmarketable." If Nicholson did not have the ability to have plaintiffs' contributions restored, it would be unreasonable to fault plaintiffs for failing to ask him to undertake such a pointless task. Even without the benefit of hindsight, Judge Hill, as the trier of fact, could determine Nicholson's proffered mitigation was both unreasonable and impractical.
In sum and in short, defendants' claim that Judge Hill "misapplied" the law of mitigation is groundless.
The issue of whether plaintiffs acted reasonably to mitigate damages was an issue of fact to be decided by Judge Hill as the trier of fact. (Agam v. Gavra. supra, 236 Cal.App.4th at p. 111.) She concluded defendants had failed to carry their burden of proving plaintiffs acted unreasonably. Defendants do not realize that such a finding places them in a very difficult position. "[T]he question on appeal is whether there was ' " 'uncontradicted and unimpeached' [evidence] 'of such a character and weight as to leave no room for a judicial determination that it was insufficient to support' " ' " that finding. (Ibid.) As so framed, that question cannot be answered in defendants' favor.
On page 7 of their opening brief, defendants identify as the second "Issue On Appeal" whether "prejudgment interest on the damage amount should be calculated from the date of the investment to October 22, 2008, the date plaintiffs first discovered what they believed to be a misrepresentation." This is the first and only time the words "prejudgment interest" appear in the brief. There is not the least attempt to comply with rule 8.204 of the California Rules of Court, so we treat the point as not preserved for review. (Clark v. Burleigh (1992) 4 Cal.4th 474, 481-482; Fernandes v. Singh (2017) 16 Cal.App.5th 932, 942-943.)
The judgment is affirmed.
/s/_________
Kline, P.J. We concur: /s/_________
Richman, J. /s/_________
Miller, J.