Opinion
NOT TO BE PUBLISHED
Super. Ct. No. 06AS04512
HULL, J.After five attempts by plaintiff to state a claim for fraud against an attorney who had assisted him in a failed business arrangement, the trial court sustained defendant’s demurrers without leave to amend. The court concluded plaintiff failed to allege defendant made any knowing misrepresentation of fact on which plaintiff relied to his detriment. We conclude plaintiff adequately stated a claim for fraud and reverse.
Facts and Proceedings
Since this is an appeal from a judgment of dismissal following an order sustaining demurrers, we summarize and accept as true all material factual allegations of the complaint and all matters properly subject to judicial notice, but not contentions, deductions or conclusions of fact or law. (Blank v. Kirwan (1985) 39 Cal.3d 311, 318.) We also accept as true facts alleged in superseded complaints which have been dropped from later versions without an adequate explanation. (Holland v. Morse Diesel Internat., Inc. (2001) 86 Cal.App.4th 1443, 1447.)
In 2001, half of the stock of Audio Visual Management Services, Inc. (AVMS), was owned by Kevin Kelly and the other half was owned by James Jungsten. Plaintiff David Oranen desired to purchase Kelly’s interest in AVMS and retained defendant David Price in August 2001 for that purpose. Defendant is an attorney and was corporate counsel for AVMS at the time.
Defendant recommended that plaintiff purchase Kelly’s interest in AVMS through plaintiff’s wholly-owned corporation, RIGO, Inc, (RIGO), and plaintiff agreed to do so. In August 2001, plaintiff delivered $400,000 of his personal funds to defendant for deposit in his client trust account. Defendant prepared a shareholder agreement whereby RIGO assumed a 50 percent interest in AVMS. Plaintiff signed the agreement as president of RIGO. Defendant also drafted a stock purchase and sale agreement providing for RIGO’s purchase of Kelly’s AVMS stock. This agreement was signed by Jungsten as authorized agent of RIGO.
Soon thereafter, defendant informed plaintiff a corporation could not own stock in another corporation and, consequently, the shareholder agreement was invalid. Defendant advised plaintiff to enter into a new agreement giving him the right to purchase the AVMS stock. At the time, defendant advised plaintiff this new agreement could not be canceled by AVMS or Jungsten. Relying on these representations, plaintiff agreed to the proposed agreement. However, defendant’s representations were in fact false and defendant knew they were false at the time.
Plaintiff, Jungsten and AVMS thereafter entered into a new agreement (the Option Agreement). It recited that plaintiff has, “through the efforts of RIGO, Inc.... invested in AVMS, loaned money to AVMS and agreed to provide certain management and consulting services to AVMS.” It set forth certain obligations of various parties, including RIGO and Kelly, and required plaintiff to assure that RIGO provide the indicated management and consulting services. It also granted plaintiff the right to purchase half of Jungsten’s shares in AVMS and provided that plaintiff may exercise this right at any time by giving Jungsten and AVMS notice and paying $1,000.
On October 20, 2003, Jungsten sent plaintiff three letters purporting to cancel the Option Agreement. Defendant assisted Jungsten in preparing these letters. Plaintiff immediately attempted to exercise the option to purchase the AVMS shares by giving notice and tendering $1,000. Jungsten refused to honor the offer.
Nearly three years later, on October 19, 2006, plaintiff initiated this action against defendant alleging two causes of action: (1) fraud, and (2) conversion. Plaintiff later filed a first amended complaint.
Defendant demurred to the complaint, asserting plaintiff lacked standing to bring the action, inasmuch as plaintiff had assigned any rights he had in AVMS to a third party, an individual named Andre Zeehandelaar. Defendant further asserted plaintiff’s claims are barred, because an earlier judgment obtained by AVMS and Jungsten against Zeehandelaar was res judicata.
The trial court sustained the demurrers on the basis of standing. Although the court rejected defendant’s assignment argument, it concluded that if plaintiff initially paid the money to purchase an interest in AVMS on behalf of RIGO, then it was RIGO’s funds and plaintiff has no standing to assert a claim based on the loss of those funds. If, on the other hand, the funds belonged to plaintiff in his individual capacity, he must so allege.
Plaintiff filed a second amended complaint in which he alleged he supplied the initial funds for the purchase “in his personal capacity.” Plaintiff further alleged the latter Option Agreement was backdated to before RIGO’s purchase, thereby eliminating RIGO’s interest altogether.
Defendant again demurred and the court again sustained the demurrers based on standing. The court indicated plaintiff could not simply plead around the allegations in the original complaint as to the initial purchase by RIGO. However, the court granted plaintiff leave to amend to allege personal investment losses.
Defendant filed a third amended complaint. In it, plaintiff again alleged the money paid for RIGO’s initial interest in AVMS came from his personal funds. He further alleged Jungsten and defendant purported to cancel the Option Agreement, and Jungsten refused to honor plaintiff’s exercise of his right to purchase AVMS stock.
Defendant again demurred and the court again sustained the demurrers with leave to amend. However, this time the court did not base its ruling on standing but on a failure to state a claim for fraud. In particular, the court concluded the complaint failed to allege a false representation, defendant’s knowledge of falsity, and damages.
After plaintiff filed his fourth and final amended complaint alleging the facts recounted above, the court again sustained defendant’s demurrers, this time without leave to amend. The court concluded that, to the extent plaintiff’s theory of fraud is based on a misrepresentation of law by defendant as to whether the option agreement could be canceled, that is not a misrepresentation actionable in fraud. In the alternative, to the extent plaintiff’s claim is based on a misrepresentation as to what Jungsten intended to do in the future, plaintiff failed to allege defendant knew at the time of the Option Agreement that Jungsten intended to cancel it.
The court entered judgment of dismissal.
Discussion
I
Preliminary Matters
Defendant contends that, for purposes of a demurrer, we may consider not only the allegations of the complaint and matters properly subject to judicial notice, but matters contained in exhibits attached to and incorporated into the complaint. He argues any matter asserted in those exhibits is considered true for purposes of a demurrer notwithstanding a contrary assertion in the complaint itself. Applying this principle, defendant argues statements made by Jungsten in his three letters to plaintiff in 2003, which letters are attached to the fourth amended complaint, must be considered true. In those letters, Jungsten asserts the Option Agreement was canceled because of plaintiff’s failure to perform his obligations under that agreement. According to defendant, we must therefore accept the fact that plaintiff failed to perform for purposes of the demurrer.
Defendant misunderstands the principle on which he relies. Defendant cites SC Manufactured Homes, Inc. v. Liebert (2008) 162 Cal.App.4th 68, 83 (SC Manufactured Homes), where the court said, in the context of a demurrer: “If the allegations in the complaint conflict with the exhibits, we rely on and accept as true the contents of the exhibits.” In that case, the plaintiff alleged it had been prohibited from selling mobile homes to customers who wished to place those homes at a particular mobile home park. However, letters from the mobile home park to the plaintiff, which were attached to the complaint, stated instead that the mobile home park would not deal directly with the plaintiff but that any of its tenants who wanted to purchase a mobile home from the plaintiff were free to do so. The Court of Appeal indicated the letters controlled under these circumstances.
In SC Manufactured Homes, the operative fact was whether the mobile home park had prohibited the plaintiff from selling to its tenants. The letters demonstrated there was no such prohibition. In the present matter, by contrast, defendant attempts to establish that plaintiff breached the option agreement based on hearsay statements in letters from Jungsten asserting such a fact. It is one thing to accept that the sender said what he said in a letter attached to the complaint, even when the complaint alleges the sender said something altogether different. However, this does not mean the court must accept the truth of hearsay declarations in the letter.
II
Plaintiff’s Fraud Claim
Plaintiff contends the fourth amended complaint states a claim for fraud. “The necessary elements of fraud are: (1) misrepresentation (false representation, concealment, or nondisclosure); (2) knowledge of falsity (scienter); (3) intent to defraud (i.e., to induce reliance); (4) justifiable reliance; and (5) resulting damage.” (Molko v. Holy Spirit Assn. (1988) 46 Cal.3d 1092, 1108.)
Plaintiff contends the trial court concluded the fourth amended complaint fails to allege three of these elements: (1) misrepresentation; (2) knowledge of falsity; and (3) intent to defraud. However, we fail to see anything in the court’s ruling to suggest it concluded plaintiff failed to allege intent to defraud. As to the other two elements, the court stated: “Plaintiff alleges that he was fraudulently induced by defendant Price to enter into the option agreement with Jungsten. This requires an allegation that defendant Price made a false representation of fact to plaintiff and knew the representation was false. To the extent that the representation consisted of a legal opinion as to whether the option agreement could be cancelled, no cause of action is stated because a legal opinion is not a fact. To the extent that the representation consisted of a statement that Jungsten would not cancel the option agreement, the statement would not be false unless defendant Price knew that Jungsten intended to cancel the option.” Although not articulated by the trial court, we note plaintiff does not allege in the fourth amended complaint that defendant knew at the time of the Option Agreement that Jungsten intended to cancel it.
We do not share the trial court’s uncertainty as to whether the fourth amended complaint alleges misrepresentation of a legal opinion about whether the Option Agreement could be canceled or misrepresentation about Jungsten’s intent to cancel. Plaintiff alleges defendant assured him the Option Agreement “could not be canceled by AVMS or Mr. Jungsten.” This is not a statement of Jungsten’s intent but a statement as to whether it was legally possible for Jungsten or AVMS to cancel the agreement.
A statement that a particular agreement may not be canceled by one of the parties is, in effect, a legal opinion about the binding effect of the agreement. The trial court concluded a legal opinion cannot form the basis of a fraud claim. We disagree.
“The general rule is that a misrepresentation of law is not actionable fraud. That is, a representation of law by a layman not occupying a confidential relationship toward the one to whom it is addressed and based on facts equally known or accessible to both does not ordinarily justify reliance on the representation.” (Regus v. Schartkoff (1957) 156 Cal.App.2d 382, 388, italics added.) Even where the representation is made by a layman, there are exceptions. “One exception is where the party expressing the opinion purports to have expert knowledge concerning the matter. [Citation.] Another exception is where the party expressing the opinion, having had superior means of information, possesses a knowledge of the law and thereby gains an unconscionable advantage over one who is ignorant and has not been in a situation to become informed. [Citation.] In either of these cases the injured party is entitled to relief. The right to relief is predicated on the same ground as if the misrepresentation of law were of a matter of fact.” (Id. at pp. 388-389.) A further exception is recognized where the parties occupy a confidential or fiduciary relationship. (Katz v. Feldman (1972) 23 Cal.App.3d 500, 504.)
In Bank of America v. Sanchez (1934) 3 Cal.App.2d 238, a husband obtained a loan from the bank secured by his separate property at a time when the husband and wife were separated. The bank, with whom the couple had done business for years, advised the wife she needed to sign the loan documents but would not be liable on the loan. This was in fact not true. The bank made the representations in order to induce the wife to sign the documents. The bank later sued the wife on the note for a deficiency after sale of the property. The trial court concluded the wife was not indebted on the note. (Id. at pp. 239-241.)
The Court of Appeal affirmed, finding both the fiduciary relationship and superior knowledge exceptions applicable. The court explained: “[T]here is substantial evidence of [the wife’s] previous business relations with the bank over a period of years in the matter of signing notes and other papers, of her husband’s former employment therein and of her acquaintance with and confidence in the officers of the bank. There is also evidence supporting the inference that the escrow officer of the bank, having had many years’ experience in the matter of real estate titles and of loans to married persons involving real estate security, had had a source and means of information as to the law affecting the rights of fixing the obligations of married persons far superior to that of [the wife], who, under the proofs herein, was chiefly engaged in managing her home and taking care of her children; and that notwithstanding the legal presumption of knowledge of the law, the evidence creates the inference that she was in fact ignorant of the intricacies of the law relating to community and separate property of spouses when used as security, and the rights and duties in respect thereto. And there is, furthermore, a reasonable and justifiable inference from all the evidence touching the transaction in question that [the wife] had been, and was held at the time of signing, in a situation such as to prevent her from becoming better informed.” (Bank of America v. Sanchez, supra, 3 Cal.App.2d at pp. 243-244.)
The fourth amended complaint alleges that, at the time of the false representations, defendant was acting as plaintiff’s attorney. He therefore occupied a position of trust and confidence while also holding himself out as having superior knowledge of legal matters. Defendant’s representations of the law therefore amounted to representations of fact.
Defendant contends the most he could have given plaintiff was a legal opinion as to whether the Option Agreement could legally be canceled. He could not guarantee Jungsten would not try to cancel it anyway. Defendant argues a misstatement of law by an attorney is actionable by way of a malpractice action, not a claim of fraud.
However, while defendant might be correct if plaintiff were alleging a mistake of law, plaintiff alleges much more. He alleges defendant not only advised him the Option Agreement could not be canceled, but knew this representation was false. In other words, defendant did not just make a mistake. He deliberately misled plaintiff. This is not simply a matter of malpractice.
Defendant nevertheless argues plaintiff failed to allege the representation that the Option Agreement could not be canceled was, in fact, false. Defendant points to the language of the Option Agreement, which contains no termination provision but instead says the option can be exercised “at any time.” Defendant asserts that, “[i]n the absence of a breach of a contract by the opposing party, a party to a contract with no specific termination date must typically provide reasonable notice before canceling the contract.”
By arguing that a party to a contract with no specific termination date must give reasonable notice of termination, defendant appears to concede the Option Agreement, which contains no termination date, could be canceled by either party, as long as reasonable notice is given. In other words, defendant appears to concede the alleged representation that the Option Agreement could not be canceled was false.
At any rate, plaintiff does allege the representation was false. In particular, plaintiff alleges defendant made a number of representations, to wit, a corporation cannot own stock in another corporation, the original shareholder agreement was invalid, plaintiff would be entitled to a 50 percent interest in AVMS upon exercise of the option, and the Option Agreement could not be canceled by Jungsten or AVMS. Plaintiff then alleges “[t]he above representations Mr. Price made to Mr. Oranen were, in fact, false.”
We recognize that elsewhere in the fourth amended complaint plaintiff appears to contradict himself by suggesting the Option Agreement could not legally be canceled. For example, plaintiff alleges the three letters sent to him by Jungsten “intentionally misrepresented Mr. Jungsten’s rights and/or abilities to cancel the Option Agreement and the Option Agreement is silent as to when/how it could be canceled. In fact, Mr. Price had assured Mr. Oranen that the Option Agreement could not be canceled.” However, we are confident these apparent inconsistencies should be sorted out according to proof in the trial court. They do not change the fact that the fundamental elements of a cause of action for fraud have been adequately set forth in the fourth amended complaint.
Defendant argues plaintiff’s fraud claim is flawed for another reason. He asserts: “[T]he Option Agreement is actually a contract between a number of parties, with rights and duties flowing in a number of different directions.” However, regardless of the fact the Option Agreement purports to place obligations on both RIGO and Kelly, in addition to plaintiff, Jungsten and AVMS, the only parties to the agreement were plaintiff, Jungsten and AVMS. Furthermore, we fail to see how the fact other parties had obligations under the agreement has any bearing on whether it was cancelable by AVMS or Jungsten.
Finally, defendant contends the legal opinion he gave plaintiff was not fraudulent because it was, in essence, a prediction about the future actions of a third party, Jungsten. However, as we have already explained, the representation was not about whether Jungsten might cancel the agreement but whether he could legally do so. This does not depend on Jungsten’s intent.
III
Alternate Grounds for Demurrer
Defendant contends even if the fourth amended complaint states a claim for fraud, his demurrers should have been sustained on other grounds. As explained above, a judgment of dismissal following an order sustaining general demurrers may be affirmed if supported on any ground raised in the demurrers. (Carman v. Alvord, supra, 31 Cal.3d at p. 324.)
Defendant contends the demurrers should have been sustained on the basis of standing. In particular, he argues that because the initial investment in AVMS was made by RIGO rather than plaintiff, any claim for loss of that investment belongs to RIGO. However, even accepting that plaintiff has no standing to pursue a claim for losses sustained by RIGO, it is clear plaintiff’s fraud claim is not premised solely on loss of the initial investment.
Plaintiff alleges three categories of losses. He asserts the money used by RIGO to make the initial investment in AVMS was obtained through a loan from him that RIGO was thereafter unable to repay because RIGO’s interest in AVMS, its only asset, was extinguished by the Option Agreement. Plaintiff further asserts that, pursuant to the Option Agreement, he “expended a significant amount of time working for AVMS to improve its value and was not compensated for his time.” Finally, plaintiff asserts he lent at least $400,000 to AVMS to improve its value but was repaid less than $100,000.
We recognize there are some obvious holes in plaintiff’s damage claims. For example, how could RIGO’s interest in AVMS have been extinguished by the Option Agreement when RIGO was not a party to that agreement? How is it that plaintiff expended significant amounts of time working for AVMS when, under the Option Agreement, it was RIGO, not plaintiff, who was obligated to provide management and consulting services to AVMS? How is it that plaintiff loaned money to AVMS when, under the Option Agreement, it was RIGO who was to loan AVMS $200,000?
However, for purposes of demurrer, we accept as true plaintiff’s factual allegations, however improbable they may be. (Del E. Webb Corp. v. Structural Materials Co. (1981) 123 Cal.App.3d 593, 604.) Therefore, defendant’s argument that the demurrers should have been sustained on the basis of standing must be rejected.
Defendant next contends the demurrers should have been sustained on the basis that plaintiff assigned away any claims he may have had in connection with AVMS. In particular, defendant asserts both plaintiff and RIGO transferred all rights they had in AVMS stock to Zeehandelaar. Defendant further contends the demurrers should have been sustained on the basis of res judicata, because Zeehandelaar, as the assignee of plaintiff and RIGO, previously sued to recover the funds plaintiff now seeks and a final judgment was entered against him.
Defendant did not raise either of these alternate grounds for demurrer below. Instead, he asserted lack of standing on three separate bases: (1) “RIGO, Inc.’s claim for damages arising from an alleged lost investment into AVMS does not inure to Plaintiff;” (2) “Defendant cannot be liable for AVMS’ failure to compensate for time worked to improve AVMS’ value, which work was to be performed by RIGO, Inc.;” and (3) “Plaintiff’s alleged Loan to AVMS is not a source of damage as to claims against Defendant.”
Although defendant did assert assignment and res judicata in his demurrers to earlier versions of the complaint, and he argues here the trial court should have sustained those demurrers without leave to amend, the trial court’s failure to sustain those earlier demurrers is not properly before us. As explained more fully above, the record contains no cross-appeal by defendant. Therefore, defendant cannot challenge those earlier rulings and is restricted to asserting as alternate grounds for sustaining the demurrers those grounds raised in his demurrer to the fourth amended complaint.
At any rate, plaintiff’s assignment of any claims he might have had against AVMS would not appear to preclude an independent claim he might have against defendant. Plaintiff’s claims against defendant are generally premised on loss of any viable claims against AVMS or Jungsten. For example, to the extent AVMS and Jungsten were legally able to cancel the Option Agreement, such that plaintiff has no claim against them for having done so, he has a claim against defendant for fraudulently advising him that the Option Agreement could not be canceled.
As for res judicata, even if we assume plaintiff is somehow in privity with Zeehandelaar, plaintiff’s claim here is against defendant, whereas Zeehandelaar filed his case against Jungsten, AVMS, and others, not including defendant. Furthermore, the defendants in the Zeehandelaar case did not obtain a judgment on the merits. That case was dismissed as a discovery sanction.
Hence, there is no alternate basis for sustaining defendant’s demurrers to the fourth amended complaint, and the order sustaining those demurrers cannot stand.
Disposition
The judgment of dismissal is reversed. The matter is remanded to the trial court for entry of a new order overruling defendant’s demurrers to the fourth amended complaint. Plaintiff is awarded his costs on appeal. (Cal. Rules of Court, rule 8.278(a)(1).)
We concur: SIMS, Acting P.J., RAYE, J.