Opinion
G056857
02-17-2021
LORELEI MOONEY, an individual, et al., Plaintiffs and Appellants, v. CHICAGO TITLE COMPANY, et al., Defendants and Respondents.
Catanzarite Law Corporation, Kenneth J. Catanzarite, Nicole M. Catanzarite-Woodward, and Eric V. Anderton for Plaintiffs and Appellants. Hahn Loeser & Parks, Michael J. Gleason and Samuel C. Sneed for Defendants 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NOT TO BE PUBLISHED IN OFFICIAL REPORTS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 This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.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. JCCP4811) OPINION Appeal from a judgment of the Superior Court of Orange County, Kim Garlin Dunning, Judge. Reversed and remanded. Request for judicial notice granted in part and denied in part. Motion to strike granted. Catanzarite Law Corporation, Kenneth J. Catanzarite, Nicole M. Catanzarite-Woodward, and Eric V. Anderton for Plaintiffs and Appellants. Hahn Loeser & Parks, Michael J. Gleason and Samuel C. Sneed for Defendants and Respondents.
Lorelei Mooney, the Herbert and Helen Schweiger Trust, ARI-DFW East & West 9, L.P., Gary Lamm, and James Mieuli (Plaintiffs) claim to represent a class of more than 600 investors who entered into a tenant-in-common (TIC) investment scheme that ultimately failed when the real estate market crashed. The lawsuit initially named 22 defendants who were allegedly involved in a fraudulent scheme to wrongfully induce the class members to sell their real property, invest in one of 20 offered properties, and defer capital gains taxes via these transactions pursuant to Internal Revenue Code section 1031.
This appeal does not concern most of the defendants (the organizers, promoters, accountants, or attorneys who marketed and structured the deal). Rather, the trial court sustained demurrers filed by several collateral entities, on statute of limitations grounds, and Plaintiffs appealed the ensuing judgments of dismissal. Before oral argument, Plaintiffs dismissed several parties from their appeal, leaving only the companies who provided escrow and title insurance services, i.e., Chicago Title Company and Chicago Title Insurance Company (collective referred in the singular as Chicago Title).
The parties dismissed from this appeal are Burch & Company, Inc., Anton Randal Burch, Anthony W. Thompson, and Thompson National Properties, LLC.
We note this case is one of a collection of Orange County Superior Court coordinated cases, referred to as the ARI Actions. In many other cases, trial courts have sustained demurrers or granted motions of judgment on the pleadings on statute of limitations grounds. There are two published opinions (one from this court and one from the Second District Court of Appeal, Division 7) and multiple unpublished appellate opinions affirming these rulings. (Stella v. Asset Management Consultants, Inc. (2017) 8 Cal.App.5th 181 (Stella); WA Southwest 2, LLC v. First American Title Ins. Co. (2015) 240 Cal.App.4th 148 (WA Southwest).)
In 2016, this panel filed seven unpublished opinions concerning ARI Actions. (See e.g., Gee v. LaSalle Bank, N.A. (June 23, 2016, G050844) [nonpub. opn.] (Gee).)
Chicago Title asserts this appeal is déjà vu all over again, and is functionally equivalent to the legal issues decided in WA Southwest, supra. We disagree. While the fact pattern is similar, Plaintiffs have artfully amended their complaint to allege two injuries not fully disclosed in the investment-related documents attached to their complaint. At this stage of the proceedings, we must accept as true the allegations Plaintiffs were not on inquiry notice of the alleged misconduct. It is too soon to decide if the claims against Chicago Title are barred by the statute of limitations. For this reason, we reverse the judgment of dismissal entered against Chicago Title. Having considered the merits of the demurrer challenging all the causes of action alleged against Chicago Title, we conclude the trial court correctly sustained the demurrer, without leave to amend, as to the constructive fraud and negligent misrepresentation causes of action. We remand the matter for further proceedings on the four remaining causes of action asserted against Chicago Title.
PROCEDURAL HISTORY
In early 2014, the Orange County Superior Court sustained, on statute of limitations grounds, demurrers of multiple defendants in the coordinated ARI Actions (lawsuits filed in 2012). (See Gee, supra, G050844.) In 2014, Plaintiffs decided to file their lawsuit in a different venue, the Los Angeles Superior Court.
In 2015, the case was moved and added to the list of coordinated ARI Actions, but the trial court stayed Chicago Title's demurrer while the appeals filed in the other ARI Actions were pending. After those rulings were affirmed in 2015 and 2016, the trial court permitted Plaintiffs to amend their complaint. In November 2017, Plaintiffs filed a first amended complaint (FAC). The court sustained Chicago Title's demurrer and gave Plaintiffs 30 days leave to amend. In April 2018, Plaintiffs filed their second amended complaint (SAC).
Plaintiffs' SAC alleged 14 causes of action, seven of which concerned Chicago Title. Because we have described the allegations in detail multiple times before, we present a simplified version of the 78-page SAC.
The alleged putative class invested over $310,090,000, in "one or more" of 20 properties (the Properties) promoted by "the Argus Defendants" between 2003 and 2006. For each of the properties, the Argus Defendants formed a separate entity (collectively the TIC Zero Defendants), "as their instrumentality to acquire" the Properties from third party sellers. Plaintiffs alleged the TIC Zero Defendants then sold them TIC interests in the Properties. The transactions involved identical "Purchase Agreement and Escrow Instructions" (PSA), differing only in the identification of the Properties and related TIC Zero Defendant. The PSAs identified each TIC Zero Defendant as the "'Seller'" and Plaintiffs as the "'Buyer.'"
The purpose of the investment, in addition to profit, was to acquire like-kind property that enabled Plaintiffs to defer the capital gains tax on a prior sale of real estate under Internal Revenue Code section 1031 (section 1031 exchange). Because one purpose of the investment was to defer the capital gains tax, it was important to Plaintiffs that the costs associated with the TIC investment be less than expected taxes. Unbeknown to Plaintiffs, certain defendants conspired to hide costs that raised the sales load above capital gains tax rate.
With respect to Chicago Title's involvement in the scheme, Plaintiffs' SAC alleged the Argus Defendants represented they were using a licensed real estate broker, ARI Realty Broker (Broker), to arrange the TIC purchases and act as the asset property manager "post-closing." Plaintiffs claim the Broker was not properly licensed and Chicago Title had a duty to inform them about this issue during escrow and not pay the Broker's real estate commissions.
Plaintiffs also asserted Chicago Title should have informed them that the TIC Zero Defendants did not own the Properties and planned to secretly borrow Plaintiffs' escrow deposits to purchase the Properties from a third-party seller. They maintain Chicago Title had a duty to disclose the early and unauthorized disbursement of funds to TIC Zero Defendants. Plaintiffs claimed they relied on the terms of the PSA, which provided Chicago Title could not distribute the investment money to TIC Zero Defendants unless escrow closed and the investors were provided a deed to the Properties. They refer to this unauthorized use of their money as an unsecured loan, and because the Plaintiffs were serving as lenders, the TIC Zero Defendants should have paid interest and "points" on the borrowed money.
In summary, the crux of Plaintiffs' causes of action against Chicago Title relates to the following two non-disclosures: (1) the Broker's licensing status, and (2) the unauthorized and premature release of escrow funds to TIC Zero Defendants before they owned the Properties. Because the escrow transactions closed between 2004 and 2006, and Plaintiffs did not file the complaint until a decade later, the SAC included allegations of fraudulent concealment and delayed discovery.
The trial court sustained Chicago Title's demurrer to the SAC without leave to amend, concluding the causes of action were time barred. In July 2018, it entered judgment in favor of Chicago Title. After filing their notice of appeal challenging this ruling, Plaintiffs filed a third amended complaint (TAC) as to the remaining defendants (the Argus Defendants). They included a copy of the complaint in their appendix, which Chicago Title moved to strike because it was not part of the underlying case. We agree the complaint (and related order regarding the TAC) was inappropriately included and grant the motion to strike these documents from the appellant's appendix.
Plaintiffs argue judicial notice of the TAC is necessary for proper consideration of an issue on appeal (Cal. Rules of Court, rule 8.124(b)(3)) because this court must decide if there is any reasonable possibility Plaintiffs could cure their defective pleading. Plaintiffs had the opportunity to address this issue in their appellate briefing. We need not examine documents filed after the trial court made its ruling to understand their arguments.
The trial court denied Chicago Title's request for judicial notice (RJN) of the parties' Private Placement Memorandum (PPM) and documents relating to Richard Gee's California real estate broker license status. Chicago Title now asks this court to take judicial notice of the same documents (seven PPMs and Gee's license history). We will take judicial notice of all documents except the licensing history because it is evidence not appropriately considered at this juncture of the case.
Richard Gee was one of the Argus Defendants. He was the Chief Executive Officer and Chairman of ARI Realty Broker.
As for the PPMs, we recognize Plaintiffs did not attach these documents to the SAC. However, they did attach a sample PSA, which clearly stated the PPM was "incorporated herein." Moreover, Plaintiffs discussed and referred to the PPM at length in the original complaint to support the same causes of action now alleged in the SAC. "Where, as here, a demurrer is to an amended complaint, we may consider the factual allegations of prior complaints, which a plaintiff may not discard or avoid by making '"'contradictory averments, in a superseding, amended pleading.'"' [Citation.]" (Berg & Berg Enterprises, LLC v. Boyle (2009) 178 Cal.App.4th 1020, 1034 (Berg).)
We are not persuaded by Plaintiffs' argument raised in opposition to the RJN that we cannot consider the PPM because a demurrer tests the pleading alone, and no other extrinsic matter. It is well settled a court may consider judicially noticed matters. (Align Technology Inc. v. Tran (2009) 179 Cal.App.4th 949, 956, fn. 6 [appropriate to take judicial notice of settlement agreement referred to in complaint]; Ascherman v. General Reinsurance Corp. (1986) 183 Cal.App.3d 307, 311 [trial court took judicial notice of contract referenced in complaint that was dispositive of claims].)
This court, like other trial courts and appellate districts considering ARI Actions, has historically taken judicial notice of the PPM. (See Stella, supra, 8 Cal.App.5th at pp. 194-195 [PPM could be judicially noticed]; Gee, supra, G050844 [trial and appellate court granted request for judicial notice of PPM]; Dierenfield v. Commonwealth Land Title Company (Aug. 31, 2018, D072541) [nonpub. opn.] [Fourth District, Division 1] [same].) In addition, Chicago Title is not requesting that this court determine the truth of any statement in the PPM, only that it contains disclosures triggering inquiry notice. The same cannot be said for Gee's licensing history, and because the parties dispute whether Gee's license covered the Broker, we decline to take judicial notice of documents relating to a factual dispute in this case. A demurrer is not the proper forum to resolve the parties' licensing dispute.
In WA Southwest, we denied a motion to take judicial notice of the PPM because it was unnecessary. The PPM was an exhibit to the complaint and already in the record. (WA Southwest, supra, 240 Cal.App.4th at p. 152, fn. 3.)
DISCUSSION
I. Standard of Review
"In conducting our de novo review, we 'must "give[ ] the complaint a reasonable interpretation, and treat[ ] the demurrer as admitting all material facts properly pleaded." [Citation.] Because only factual allegations are considered on demurrer, we must disregard any "contentions, deductions or conclusions of fact or law alleged . . . ."' [Citation.]" (WA Southwest, supra, 240 Cal.App.4th at p. 151.) "When a demurrer is sustained, we determine whether the complaint states facts sufficient to constitute a cause of action. [Citation.] 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. [Citations.] The burden of proving such reasonable possibility is squarely on the plaintiff. [Citation.]" (Blank v. Kirwan (1985) 39 Cal.3d 311, 318.)
Moreover, "As a general rule in testing a pleading against a demurrer the facts alleged in the pleading are deemed to be true, however improbable they may be. [Citation.] The courts, however, will not close their eyes to situations where a complaint contains allegations of fact inconsistent with attached documents, or allegations contrary to facts which are judicially noticed." (Del E. Webb Corp. v. Structural Materials Co. (1981) 123 Cal.App.3d 593, 604.)
II. Guiding Principles
The parties agree the applicable statutes of limitation in this case range from two to four years. The causes of action raised against Chicago Title are as follows: (1) breach of contract (Code Civ. Proc., § 337 [four years]); (2) unfair competition law (UCL) (Bus. & Prof. Code, §17208 [four years]); (3) breach of fiduciary duty (Code Civ. Proc., § 343 [four years]); (4) constructive fraud (Code Civ. Proc., § 338, subd. (d) [three years]); (5) negligence and negligent misrepresentation (Code Civ. Proc., § 339, subd. (1) [two years]); and (6) unjust enrichment (a remedy, not a separate cause of action, having the same statute of limitation as the underlying cause of action). Plaintiffs do not dispute their claims accrued between 2004 and 2006, when escrow closed, nor that a four-year statute of limitations would generally bar any litigation initiated after 2010. Plaintiffs filed their complaint in 2014. Plaintiffs assert the discovery rule applies to delay accrual of their causes of action, or the doctrine of fraudulent concealment applies to toll the statute of limitations.
"California law recognizes a general, rebuttable presumption, that [p]laintiffs have 'knowledge of the wrongful cause of an injury.' [Citation.] In order to rebut that presumption, '"[a] plaintiff whose complaint shows on its face that his claim would be barred without the benefit of the discovery rule must specifically plead facts to show (1) the time and manner of discovery and (2) the inability to have made earlier discovery despite reasonable diligence." [Citation.] In assessing the sufficiency of the allegations of delayed discovery, the court places the burden on the plaintiff to "show diligence"; "conclusory allegations will not withstand demurrer.' [Citation.]" (Grisham v. Philip Morris U.S.A., Inc. (2007) 40 Cal.4th 623, 638.)
When a plaintiff reasonably should have discovered facts for purposes of the accrual of a cause of action or application of the delayed discovery rule is generally a question of fact. The issue may be decided as a matter of law only if the evidence (or, in this case, the allegations in the complaint and facts properly subject to judicial notice) can support only one reasonable conclusion. (See Jolly v. Eli Lilly & Co. (1988) 44 Cal.3d 1103, 1112 (Jolly).)
III. Application of the Discovery Rule
In the SAC, Plaintiffs allege they could not have discovered their causes of action against Chicago Title, despite due diligence, until March 2012. They explained their counsel, then representing parties in a different ARI case, performed an "independent investigation" in October 2011, after learning there was an income tax issue after a foreclosure. During counsel's investigation of "capital loss and income tax treatment," he learned "from third party sources in the real estate broker to broker communications and from other related escrow transactions" about the licensing issues and "unauthorized loan."
The SAC also alleged when, how, and what was discovered to prompt the lawsuit. "In March 2012[,] Plaintiffs were contacted by counsel . . . [and] learned for the first time that Plaintiffs' [d]eposits and distributions from escrow . . . were performed in breach" of the PSAs. Plaintiffs claimed they also learned for the first time that Chicago Title failed to "inquire" about the Broker's licensing status. They maintain it was not possible to learn this information earlier, despite reviewing the PSAs, loan related documents, TIC agreements, or assignment and assumption agreements. Plaintiffs assert these documents "did not unveil, nor disclose" their escrow deposits "were misused" or that the Broker was "not licensed." They claimed to have "diligently reviewed" and relied on Chicago Title's closing statement and related documents.
Plaintiffs failed to attach most of these documents to the SAC. They included only two exhibits: (1) the purchase agreement and escrow instructions (PSA); and (2) the managing broker-dealer agreement.
The trial court determined the allegations relating to why Plaintiffs could not have discovered the causes of action earlier were conclusory. At the hearing, when counsel offered to amend the complaint with additional facts, the court noted it previously gave Plaintiffs leave to amend the complaint and clearly told them to include factual allegations to support delayed discovery. It stated, "You should have had [facts] in this version. You know, you don't have . . . enough." The court offered the following explanation: "[C]onclusory allegations won't cut it. And using . . . convenient financial phrases won't cut it. I need fact allegations. And . . . I'm just not sure that you got them because . . . I really haven't heard any today." It questioned whether the assertion an attorney learned information from unidentified third parties was significant if the information was available at the time of the investment.
This same question is at the heart of the parties' arguments on appeal. Simply stated, they disagree about whether Plaintiffs, at the time they invested, were on inquiry notice of the two non-disclosures Plaintiffs now claim caused them harm. Chicago Title maintains Plaintiffs were on inquiry notice of the purported wrongs when the transactions closed (2006 through 2008). Plaintiffs disagree and assert the complaint adequately explains the time and manner of discovery as well as the inability to have made an earlier discovery. We will address each alleged harm separately. A. Licensing Issue
In their briefing, Plaintiffs repeat the allegations raised in the SAC. They assert this injury was not discoverable at the time of the transaction because they had no reason to suspect wrongdoing until another investment property went into foreclosure, prompting their attorney to investigate the escrow transactions. In response, Chicago Title argues Plaintiffs' conclusory allegations failed to establish they could not have made an earlier discovery despite reasonable diligence. It asserts the fact an attorney learned information from unidentified third parties is not in itself significant if the information was available at the time of investment. Chicago Title maintains Plaintiffs need to allege "facts as to why a reasonably diligent investor could not have discovered the same facts their attorney did nearly a decade later when attempting to unwind the high-risk, unsuccessful investment . . . ."
In addition, Chicago Title notes licensing is generally a matter of public record and if the Broker's license status was material to making the investment, as Plaintiffs now allege, there is no reason they could not have conducted the same public license search their attorney made in 2011. Chicago Title asserts Plaintiffs did not allege in their complaint that this information was not publically available when they invested in the Properties. It points to "representations" Plaintiffs made in the PSA, stating they were sophisticated investors who understood the "'substantial'" and "'significant'" risk in the investment. Plaintiffs also represented in writing that they consulted their own legal and financial advisors, and reviewed all the documents, to understand the nature of this risky investment. Chicago Title concludes these representations confirmed Plaintiffs "should have performed the same inquiry at the outset of their investment that [their attorney] performed nearly a decade later . . . ."
We agree the PSA and PPM both disclosed the high-risk nature of this section 1031 exchange transaction. As stated in WA Southwest, sophisticated investors considering "illiquid, unregistered securities" cannot ignore the PPM and documents provided prior to investing. (WA Southwest, supra, 240 Cal.App.4th at p. 157.) However, contrary to Chicago Title's contention, this court in WA Southwest did not hold the risky nature of transaction provides a factual basis to suspect any generalized harm. Rather, we determined the WA Southwest plaintiffs were put on notice of the "falsity of any communications they may have received about the sales load, tax advantages, or risk-free nature of the investments" because that information was disclosed in the PPM. (Ibid.) We explained, "Plaintiffs only needed the private placement memorandum and a calculator to obtain the information they now deem essential." (Id. at p. 158.) Considering the risky nature of the transaction, and the investor's level of sophistication, we concluded, "[r]easonable diligence in such circumstances does not consist of ignoring a [PPM] received prior to making an investment." (Id. at p. 157.)
In the case before us, nothing in the investment documents would have put Plaintiffs on notice the Argus Defendant's Broker was unlicensed. Evidence regarding the risky nature of the transaction, standing alone, is not enough to conclude a party was on inquiry notice for all potential harms. There must also be a "factual basis for suspicion." (WA Southwest, supra, 240 Cal.App.4th at p. 157.) And as aptly pointed out by Plaintiffs, they had no duty to proactively search through public records to check the Broker's licensing status. (Federal Deposit Ins. Corp. v. Dintino (2008) 167 Cal.App.4th 333, 352 (Dintino).)
In the Dintino case, a bank brought an unjust enrichment claim many years after it mistakenly recorded a reconveyance. (Dintino, supra, 167 Cal.App.4th at p. 352.) The bank did not sue until after the borrower sold the property securing the debt without paying off the note. (Ibid.) The borrower argued the case was untimely filed because the reconveyance was a matter of public record and the statute of limitations began to accrue immediately after the bank's mistake. The court declined to impose a "duty to continually monitor all public records" to determine if there is a cause of action for unjust enrichment or mistake. (Id. at p. 353.) "[The recording] mistake, by itself, was insufficient to make a reasonable person suspicious that he or she may have a cause of action and therefore to impose a duty to investigate. Rather, there must be some separate (e.g., future) occurrence of which Bank, as a reasonable entity, should be charged with knowledge that would reasonably cause it to suspect it may have a cause of action for unjust enrichment based on mistake." (Id. at pp. 352-353.)
In the case before us, Plaintiffs asserted it had no reason to suspect the Broker was unlicensed at the time of the transaction. They pled specific facts about when and how they discovered the injury arising from the licensing issue. Based on the facts pled in the SAC, and judicially noticed documents, we disagree with Chicago Title's argument Plaintiffs should have been on inquiry notice at the time of the transactions. B. Unauthorized Loan Issue
In the original complaint, Plaintiffs asserted Chicago Title was a willing participant in a fake double escrow, which enabled the Argus Defendants to misrepresent the purchase price and hide who was paying commissions and fees. This complaint also alleged the fake double escrow "made it appear" TIC Zero Defendants had the funds to close the purchase of the Properties but "Plaintiffs were unknowingly providing the down payment to complete the closing of the unrelated seller sale to the TIC Zero Class."
Plaintiffs amended their complaint after this court filed WA Southwest, and they removed references to the PPM and allegations based on the hidden sales load exceeding the capital gains tax rate. Plaintiffs took a new approach with respect to Chicago Title by dropping the "fake double escrow" language and replaced it with allegations the Argus Defendants used alter egos, the TIC Zero Defendants, to secretly borrow the investors' money. Specifically, Plaintiffs alleged TIC Zero Defendants acted as the Argus Defendants' "instrumentalities" to breach the PSAs by accepting Plaintiffs' cash deposits "before delivery of the deed to the respective Properties to Buyers in escrow" and disbursing the money to the under-capitalized TIC Zero Defendants. They construe the TIC Zero Defendants' collection of Plaintiffs' money in this fashion to be the equivalent of "an unauthorized and undisclosed loan, without just and adequate compensation[.]" They assert they would not have invested in the scheme had they known this fact and they were further injured by TIC Zero Defendants' failure to pay loan points or interest ($15,000,000 in points and $7,500,000 in interest).
Plaintiffs' delayed discovery allegations regarding this unauthorized loan are identical to the contentions raised with respect to the licensing issue. In short, Plaintiffs asserted they had no reason to suspect during escrow that the TIC Zero Defendants planned to use the investment funds to purchase the Properties. Plaintiffs maintain it was not until after a different investment property foreclosed that their attorney investigated deeper into the escrow component of Plaintiffs' section 1031 exchange.
Chicago Title argues this case is functionally identical to WA Southwest because the investment documents disclosed the alleged harm. We agree this case and WA Southwest concern similarly structured multi-million dollar real estate investments. In both cases investors sought to defer payment of property gains taxes by investing in TIC interests in real property marketed by investment firms. In both cases the investors lost their money and (represented by Catanzarite Law Corporation) sued every person and entity remotely connected to the investment deal. At issue in WA Southwest was the plaintiffs' claim they would not have invested in the property if they had known about hidden fees, which increased the sales load above the 15 percent capital gains tax rate. Following our publication of WA Southwest, Plaintiffs in this case amended their complaint to remove these same allegations against Chicago Title (a purported co-conspirator), and instead emphasized different harms related to escrow duties. Nevertheless, Chicago Title argues the analysis made in WA Southwest is still applicable. It asserts the case is on all fours with this one because the investment documents contained information that not only placed Plaintiffs on inquiry notice about the increased sales load (discussed in WA Southwest), but also about the early disbursement of escrow funds to help TIC Zero Defendants purchase the Properties. We disagree. The disclosures here did not clearly put Plaintiffs on inquiry notice like those in the WA Southwest case.
We turn first to the PSA, an agreement entered into between Plaintiffs and the TIC Zero Defendants, which discussed not only the terms of sale but also provided a rough timeline for opening and closing escrow. The escrow instructions stated the "escrow agent" would place the investors' $5,000 deposit into a bank account held by the escrow agent. Escrow would open when the agent received from the Buyer this deposit and several other documents. Thereafter, Buyer would deposit the "Cash Portion" of the purchase price into escrow and assume Seller's obligations to pay a bank loan (obtained to purchase the Properties). Although Chicago Title did not sign the PSA, the agreement specified, "Seller shall open Escrow by depositing with the Escrow Agent a fully executed original of this Agreement for use as escrow instructions." The parties agreed they could "execute additional escrow instructions not inconsistent with the terms of [the PSA] reasonably required by Escrow Agent."
Chicago Title maintains the PSA forewarned investors the deal involved two concurrent real estate purchases. They argue the PSA clearly explained the plan was for (1) the newly formed TIC Zero Defendants to purchase the investment Properties from a third party seller and (2) simultaneously sell TIC interests in those Properties, proportionate to each investor's financial contribution. Chicago Title argues the concurrent nature of these two steps was mentioned twice in the PSA.
It points first to the PSA's recitals section, which acknowledges, "Seller has purchased or will hereafter purchase" the Properties described in the PPM "incorporated herein." (Italics added.) Chicago Title argues the investor could infer from this italicized language that investment funds would be used for the capitalization of TIC Zero Defendants before it purchased the Properties. It concludes this language should have placed Buyer's on notice the purchase would occur simultaneously with the escrow described in the PSA.
Chicago Title asserts an additional and similar disclosure can be found on the PSA's fourth page, under section "3.1.4. Acquisition of the Property." (Underline omitted.) This section represents one of four factors listed under the heading "3. Conditions to Closing."
Section 3.1.4 provided the following: "Seller [the designation for TIC Zero Defendants] shall have acquired, or be concurrently acquiring, the Property, it being understood that Seller shall have acquired both properties in order to have satisfied this Section." (Italics added.) Section 3.2 provided that section 3.1.4 was for "the parties mutual benefit and may only be waived by Seller and Buyer" and if not waived by the closing date "then either party . . . may terminate the Escrow and this Agreement . . . ."
We agree with Chicago Title's assessment section 3.1.4 certainly disclosed the possibility the TIC Zero Defendants could be in the process of acquiring the Properties when the investors placed their deposits into escrow. However, this language does not suggest investment money would be released to the TIC Zero Defendants before escrow closed. Section 3.1.4 simply clarified ownership was a condition of escrow closing, not opening.
We conclude the two PSA "disclosures" notified Plaintiffs the TIC Zero Defendants would be concurrently purchasing Property from third parties at the same time it was selling TIC interest to investors. However, the concurrent nature of these events does not answer the question of whether investors should have suspected the harm created when their escrow deposits were prematurely disbursed to the TIC Zero Defendants before it owned the Properties. Plaintiffs do not claim they were harmed by TIC Zero Defendants purchasing properties during escrow. Rather, they were injured by Chicago Title giving TIC Zero Defendants early access to their earmarked section 1031 exchange funds.
To hold the PSA notified Plaintiffs of their injury, we would have to conclude they should have intuitively understood the escrow deposits were needed to bankroll the newly formed and undercapitalized TIC Zero Defendants. We cannot do so because it is not the only reasonable inference to be drawn from the "concurrently acquiring" language in the PSA. After all, the entire PSA was drafted for a Buyer seeking to directly purchase "an undivided interest" in property to take advantage of a section 1031 exchange. There was no language suggesting the Buyer was interested in investing in, or loaning money to, the TIC Zero Defendant. Moreover, the PSA contained a specifically phrased "representation" that the Buyer understood the risks involved in section 1031 exchanges. If the true nature of the simultaneous double escrows had been disclosed, we would expect to see an additional "representation" that Buyer understood the risks and potential negative tax consequence in loaning money to and/or funding a brand new, undercapitalized company. In addition, we found nothing in the PSA indicating the TIC Zero Defendants were undercapitalized. If we assume investors read the PPM, it also did not suggest TIC Zero Defendants needed to be capitalized. It simply noted the TIC Zero Defendants had the ability to purchase the Properties primarily with a bank loan as well as some undefined "fund reserves." Thus, neither the PSA or PPM suggested the investors' cash deposits would be needed, used, or borrowed before escrow closed. And although there may exist additional evidence on this point, we cannot say that at this juncture "'reasonable minds can draw only one conclusion from the evidence.'" (E-Fab, Inc. v. Accountants, Inc. Services (2007) 153 Cal.App.4th 1308, 1320.)
Although we granted Chicago Title's request for judicial notice of the PPMs, this investment document does not contain any helpful disclosures about the TIC Zero Defendants. Chicago Title mistakenly focuses on disclosures regarding a different entity, referred to as "the Company." They cite to portions of the PPM disclosing the Company was a newly formed entity that required capitalization before it could purchase property. They omit references explaining the Company's purpose was to eventually purchase a TIC interest in real estate acquired by the TIC Zero Defendants.
As we will explain in more detail below, "the Company" referred to in the PPM offered a different investment opportunity than the one offered by the TIC Zero Defendants. And while the PPM disclosed details about the Company's investment deal, it did not elaborate on the TIC Zero Defendants' scheme to sell TIC Interests. The PPM repeatedly cautioned investors the terms of the TIC transaction could be found in the PPM addendum (Addendum), which was not included in the RJN and is not part of this record. Thus, we do not know if the same disclosures made in the PPM about the Company were included in the Addendum's discussion of the TIC Zero Defendants. In short, there is not enough here to decide this issue as a matter of law via a demurrer.
There is no evidence to support Chicago Title's argument each PPM's reference to "the Company" applied to a TIC Zero Defendant. To the contrary, the PPMs disclosed the purpose of "the Company" was to acquire and operate the Properties. The document explains the Company's "[a]ffiliate," referred to as "'ARI'" or the "'Manager'" (ARI/Manager) was formed to purchase the property from a third party seller by securing a bank loan and using "fund reserves." Five of the seven PPMs offered investors the opportunity to purchase interests in the Company, called "Units." "At the same time" ARI (a TIC Zero Defendant) offered undivided tenant in common interests in the Property (Interests) to "additional purchasers ('Purchasers'), as set forth in the Addendum" to the PPM. Thus, contrary to Chicago Title's assertion, investors would have no reason to suspect the Company, mentioned in the PPM, was the same entity as the TIC Zero Defendant selling them TIC "Interests" to additional "Purchasers."
The remaining two PPMs only offered TIC Interests to investors, not Units in the Company.
For example, one PPM stated the ARI/Manager was "ARI-DFW East & West, L.P." and the Company was "ARI-DFW Direct Participant L.P." The PSA attached to the complaint stated the sale agreement was between this same ARI entity (ARI-DFW East & West, L.P.) and the Buyer (Plaintiffs). Plaintiffs' SAC listed this same entity (ARI-DFW East & West, L.P.) as one of many named TIC Zero Defendants. The company, ARI-DFW Direct Participant L.P., is not listed.
Chicago Title argues investors were advised to carefully read the PPM, which disclosed the sale terms for TIC Interests. Not so. The PPMs repeatedly stated the terms for purchasing "Units" in the Company was outlined in the PPM, while information regarding how to buy TIC Interests from ARI was included in the Addendum to the PPM. Whether purchasing Units or Interests, the PPM advised investors should "carefully read this entire memorandum and, if interested in purchasing an interest, the Addendum." (Bold and capitalization omitted, italics added.) We will not speculate about whether information in the Addendum perhaps triggered inquiry notice for purposes of the delayed discovery rule.
On a final note, Chicago Title asserts the PPM disclosed the Company planned to purchase property. It relies on the following provision: "[The] Offering [was] being made to capitalize the Company with an amount sufficient to acquire its Interest in the Property . . . ." The statement must be read in context. The PPM disclosed, "Once the Company and ARI have raised sufficient funds pursuant to this Memorandum and Addendum, ARI will sell an undivided interest in the Property to the Company . . . ." (Italics added.) The PPM further explained, "The number of Units available for purchase will depend, in part, on the number of Interests sold by ARI, which will determine the portion of the Property available for purchase by the Company." We found nothing in the PPM suggesting the Company planned to purchase property from a third party.
To summarize, we conclude the PPM does not assist Chicago Title in proving Plaintiffs should have been on inquiry notice of any harm based on disclosures about the Company. The Company and the TIC Zero Defendants are affiliated but separate entities, each offering a different investment opportunity. We have no reason to treat the PPM's disclosures about the Company as applying equally to ARI (TIC Zero Defendants). While the PPM echoed the PSA's disclosures about the concurrent nature of two escrows, neither document suggested investment money would be used to fund the second escrow. As mentioned, at this stage of the proceedings, we accept as true the allegation Plaintiffs were not aware of the deceptive practice of borrowing escrow deposits without paying points or interest on the borrowed money.
III. The Merits
Having decided Plaintiffs adequately pled delayed discovery, we must address the other grounds of the demurrer. As will be explained, we have determined four of the six causes of action against Chicago Title survive the demurrer. A. Breach of Duty Based Claims (First, Third & Fifth Causes of Action)
Chicago Title demurred to the breach of contract, breach of fiduciary duty, and negligence causes of action on the grounds it followed the escrow instructions, which provided for concurrent closings on both Plaintiffs' purchase on TIC Interests and a TIC Zero Defendant's purchase from a third party. As explained above, we disagree with Chicago Title's reading of the PSA and the PPM as advising Plaintiffs there was a double escrow, or instructions permitting the escrow agent to disburse investment money for any reason other than purchase of the TIC Interests (for the planned section 1031 exchange). At this stage of the proceedings, there is no evidence from which to determine as a matter of law Plaintiffs had notice the escrow agents had authority to disburse Plaintiffs' money before the close of escrow, when closing was specifically conditioned on acquiring the Property. (See PSA section 3.1.4.) Accordingly, these duty-based causes of action survive the demurrer.
Causes of action based on the licensing issue also cannot be resolved at this time. Chicago Title's duties regarding the licensing issue is properly premised on the theory Business and Professions Code section 10138 makes it illegal to pay compensation to an unlicensed broker. Plaintiffs recognize this statutory provision is not expressly mentioned in the PSA, but maintain it is an implied in fact term. (Kangarlou v. Progressive Title Co., Inc. (2005) 128 Cal.App.4th 1174, 1179 (Kangarlou).) This may be true. The Kangarlou case confirmed escrow holders have a fiduciary duty to the parties in escrow to obtain reliable evidence that the real estate broker is regularly licensed before paying the broker a commission, and to communicate facts concerning the broker's license to the parties in escrow. (Ibid.) As the Kangarlou court noted, this obligation arises out of Business and Professions Code section 10138, which makes it a misdemeanor for any person, "whether obligor, escrowholder or otherwise, to pay or deliver to anyone a compensation . . . who is not . . . a regularly licensed real estate broker at the time such compensation is earned." We recognize Chicago Title also disputes whether a commission fee was actually paid to an unlicensed broker, however, Plaintiffs' allegations to the contrary about this fact are enough to withstand a demurrer. B. Unfair Competition Law (Second Cause of Action)
Plaintiffs have also stated a cause of action under the UCL (Bus. & Prof. Code, § 17200 et seq.). We appreciate Chicago Title's argument that this statutory provision does not apply to securities transactions. (Bowen v. Ziasun Technologies, Inc. (2004) 116 Cal.App.4th 777, 788, fn. 9 [dismissing UCL claims for mismanagement of investment account, relying in part on existence of "the comprehensive regulatory umbrella of the Securities and Exchange Commission over such transactions"].) However, Chicago Title fails to recognize, "[C]ourts have narrowed Bowen's broad language and have allowed [Business and Professions Code s]ection 17200 claims to proceed where the claims were tangentially related to securities transactions. [Citation.]" (Betz v. Trainer Wortham & Co. (N.D. Cal. 2011) 829 F.Supp.2d 860, 866.) General business practices of a company in the securities business may be actionable through the UCL because general business practices affect the investing public generally. (See, e.g., Overstock.com, Inc. v. Gradient Analytics, Inc. (2007) 151 Cal.App.4th 688 [permitting business's UCL claims that stock price diminished by a securities analyst's defamatory reports]). We conclude there exists a factual dispute about whether the claim against the escrow/title company was tangentially related to a securities transaction, and more importantly, whether the purchase of a TIC interest in real property is covered by the regulatory umbrella of federal securities laws. Thus, at this juncture it would be premature to dismiss the second cause of action. C. Fraud Based Claims (Fourth & Twelfth Causes of Action)
We conclude the trial court properly sustained Plaintiffs' causes of action for constructive fraud and negligent misrepresentation due to the failure to plead specific facts to support both theories of recovery. "[F]raud must be pled specifically; general and conclusory allegations do not suffice. [Citations.] 'Thus "'the policy of liberal construction of the pleadings . . . will not ordinarily be invoked to sustain a pleading defective in any material respect.'" [Citation.] [¶] This 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.' [Citation.]" (Lazar v. Superior Court (1996) 12 Cal.4th 631, 645.)
Relevant to this case, '"Liability may . . . be imposed on one who aids and abets the commission of an intentional tort if the person (a) knows the other's conduct constitutes a breach of duty and gives substantial assistance or encouragement to the other to so act or (b) gives substantial assistance to the other in accomplishing a tortious result and the person's own conduct, separately considered, constitutes a breach of duty to the third person." [Citation.]' [Citation.]" (Casey v. U.S. Bank Nat. Assn. (2005) 127 Cal.App.4th 1138, 1144 (Casey).) "'[A]iding and abetting . . . necessarily requires a defendant to reach a conscious decision to participate in tortious activity for the purpose of assisting another in performing a wrongful act.' [Citation.]" (Id. at p. 1146.)
Plaintiffs' fourth cause of action alleged Chicago Title committed constructive fraud by allowing the unauthorized loans of their investment funds to capitalize TIC Zero Defendants. The SAC added the allegation Chicago Title, "by and through their authorized agent, Kandy Knotts, senior escrow officer, and others [whose identities are unknown] committed and/or aided and abetted the misrepresentations to Plaintiffs, and concealed material facts from Plaintiffs . . . ." Merely adding the name of Chicago Title's senior escrow officer was not enough to satisfy the specificity requirements discussed in Lazar and Casey. The court properly sustained the demurrer to the fourth cause of action for constructive fraud.
Likewise, the court correctly sustained Chicago Title's demurrer with regard to the 12th cause of action for negligent misrepresentation. "Negligent misrepresentation is narrower than fraud. While a person can be held liable for fraud for the '[t]he suppression of a fact, by one who is bound to disclose it or who gives information of other facts which are likely to mislead for want of communication of that fact' [citation], negligent misrepresentation requires a false statement of a past or existing material fact [citation]." (Shamsian v. Atlantic Richfield Co. (2003) 107 Cal.App.4th 967, 984.) The law requires "something more than an omission" to establish negligent misrepresentation, "even as against a fiduciary." (Byrum v. Brand (1990) 219 Cal.App.3d 926, 941; id. at p. 942 ["for a cause of action for negligent misrepresentation, clearly a representation is an essential element"].) Negligent misrepresentation is the "assertion, as a fact, of that which is not true, by one who has no reasonable ground for believing it to be true." (Civ. Code, § 1710, subd. (2).)
Here, Plaintiffs do not allege Chicago Title or its senior escrow officer made any positive assertions. Rather, they allege Chicago Title was "vicariously liable for the affirmative misrepresentations of [Broker] and the Argus Defendants through the TIC Zero Defendants" as described "in the 10th cause of action," alleging fraud and deceit against the Argus Defendants. (Capitalization omitted.) Plaintiffs' 10th cause of action described the following four fraudulent promises: (1) the TIC Zero Defendants would not receive the investor's funds until after they conveyed the deed to the respective properties; (2) the Argus Defendants/TIC Zero Defendants would "cooperate in Plaintiffs using the TIC Interest acquisition as completing a tax-deferred exchange"; (3) the Broker would be properly licensed; and (4) the Broker would investigate "for investment product suitability."
Plaintiffs' SAC offers only vague and conclusory assertions that one or more escrow agents knew about these fraudulent promises. Plaintiffs simply allege Knotts, "and other" escrow agents, knew the terms of the PSA and "knew of the falsity of the promises made therein concerning use" of escrow deposits "by performing the escrow in a manner prohibited by the [PSA]." They did not include allegations connecting the escrow/title company to the Argus Defendants or other parties who promoted and orchestrated the entire fraudulent scheme. Because there are multiple layers of fraud in this purported section 1031 exchange, we have no reason to infer Chicago Title (through it employees) consciously decided to participate, encouraged, or substantially assisted the other defendants in scamming Plaintiffs. "Knowledge is the crucial element" for imposing vicarious liability on parties that perform legitimate services, which aid fraudulent conduct. (Casey, supra, 127 Cal.App.4th at p. 1145.)
As noted by Chicago Title in its briefing, the Argus Defendants made many representations during the offering, prior to escrow. It is not enough to simply allege Chicago Title must have figured out the fraudulent scheme before the close of escrow. "Mere knowledge that a tort is being committed and the failure to prevent it does not constitute aiding and abetting. (Cf. CALJIC No. 3.01.) 'As a general rule, one owes no duty to control the conduct of another . . . .' [Citations.]" (Fiol v. Doellstedt (1996) 50 Cal.App.4th 1318, 1326.) For all the above reasons, we conclude the court properly sustained the demurrer to the twelfth cause of action for negligent misrepresentation. D. Leave to Amend
Plaintiffs bore the burden of proving a reasonable possibility of amendment. "To satisfy that burden on appeal, a plaintiff 'must show in what manner he can amend his complaint and how that amendment will change the legal effect of his pleading.' [Citation.] The assertion of an abstract right to amend does not satisfy this burden. [Citation.] The plaintiff must clearly and specifically set forth the 'applicable substantive law' [citation] and the legal basis for amendment, i.e., the elements of the cause of action and authority for it. Further, the plaintiff must set forth factual allegations that sufficiently state all required elements of that cause of action. [Citations.] Allegations must be factual and specific, not vague or conclusionary. [Citation.]" (Rakestraw v. California Physicians' Service (2000) 81 Cal.App.4th 39, 43-44.)
Here, the trial court gave Plaintiffs two opportunities to amend their complaint following publication of the WA Southwest decision. In their appellate briefing, Plaintiffs maintain the trial court erred in denying them leave to amend the delayed discovery allegations (an issue rendered moot by our ruling the demurrer should not have been sustained on statute of limitations grounds). With respect to the merits of their claims, Plaintiffs assert each cause of action was adequately pled. Because Plaintiffs have made no attempt to meet the burden of setting forth additional factual allegations with respect to the constructive fraud and negligent misrepresentation causes of action, we affirm the trial court's decision to sustain the demurrer as to the fourth and twelfth Causes of Action.
DISPOSITION
We reverse the judgment and the trial court's order sustaining the demurrer to the causes of action for breach of contract, negligence, breach of fiduciary duty and violation of Business and Professions Code section 17200 (first, second, third, and fifth causes of action). We affirm the trial court's order sustaining the demurrer to the fourth and twelfth causes of action for constructive fraud and negligent misrepresentation. We grant Chicago Title's motion to strike and grant in part its request for judicial notice. In the interests of justice, neither party shall recover their costs on appeal.
O'LEARY, P. J. WE CONCUR: BEDSWORTH, J. MOORE, J.